A business promises to pay the investor of $2000 today with a payment of $500 in one year's time, $1000 in two years' time and $1000 in three years' time. What is the net present value of this business opportunity if the interest rate is 5% per year?

Question

Quizplus · Accepted Answer

To calculate the net present value, we need to find the present value of each payment and add them together.
PV of $500 in one year = $500/(1+0.05)^1 = $476.19
PV of $1000 in two years = $1000/(1+0.05)^2 = $907.03
PV of $1000 in three years = $1000/(1+0.05)^3 = $863.84

Net present value = -$2000 + $476.19 + $907.03 + $863.84 = $247.06

Therefore, the best choice is C.

A Business Promises to Pay the Investor of $2000 Today