What would you pay for an investment that pays you $1,000,000 after forty years? Assume that the relevant interest rate for this type of investment is 6%.

Question

Quizplus · Accepted Answer

This question requires the use of the present value formula: 
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. Plug in the given values:
PV = 1,000,000 / (1 + 0.06)^40
PV = 1,000,000 / 17.466
PV = $57,247.60
Therefore, you would be willing to pay up to $57,247.60 today for an investment that will pay you $1,000,000 in 40 years at a 6% interest rate. However, the closest answer option is B, which is $311,800. Therefore, B is the best choice - but it is not the exact answer.

What Would You Pay for an Investment That Pays You