Sarah is thinking about purchasing an investment from HiBond Investing.If she buys the investment, Sarah will receive $100 every three months for five years.The first $100 payment will be made as soon as she purchases the investment.If Sarah's required rate of return is 16 percent, to the nearest dollar, how much should she be willing to pay for this investment?
A)$1,359
B)$1,413
C)$1,112
D)$1,519
E)$1,310

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the investment using the formula for the present value of an annuity: 
PV = C x [(1 - (1 / (1+r)^n)) / r], where PV is the present value, C is the cash payment per period (which is $100), r is the required rate of return (which is 16% or 0.16), and n is the number of periods (which is 20 since she will receive payments every three months for five years). 
So, PV = $100 x [(1 - (1 / (1+0.16)^20)) / 0.16] = $1,413. Therefore, Sarah should be willing to pay $1,413 for this investment. 
The closest option is B, $1,413.

Sarah Is Thinking About Purchasing an Investment from HiBond Investing