If you are to receive a payment of $200 at the end of the first year and a payment of $250 at the end of the second year and the market interest rate is 5 percent, the present value of this income stream is

Question

Quizplus · Accepted Answer

To calculate the present value of future payments, we need to use the present value formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the discount rate (market interest rate), and n is the number of years.

So, for the first payment of $200 at the end of the first year, the present value is:

PV1 = 200 / (1 + 0.05)^1 = $190.48

For the second payment of $250 at the end of the second year, the present value is:

PV2 = 250 / (1 + 0.05)^2 = $225.75

The total present value of the income stream is:

PV1 + PV2 = $190.48 + $225.75 = $416.23

Therefore, the best choice is B, $417.23

If You Are to Receive a Payment of $200 at the End