Suppose a new piece of capital equipment will deliver a stream of MRPs of $1000 each year for 3 years (beginning one year from today).What is the present value of this stream of benefits,assuming that the annual rate of interest is 5%?

Question

Quizplus · Accepted Answer

The present value of a stream of benefits can be calculated using the formula PV = CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3, where PV is the present value, CF is the cash flow, r is the annual interest rate, and the subscripts represent the time period (1 = year 1, 2 = year 2, etc.). Plugging in the values from the problem, we get PV = 1000/(1+0.05)^1 + 1000/(1+0.05)^2 + 1000/(1+0.05)^3 = $2723.25. Therefore, the best choice is B.

Suppose a New Piece of Capital Equipment Will Deliver a Stream