An investment pays $2,000 every month for 2 years.Your opportunity cost is 10% compounded annually.The present value of this investment is approximately
A)$43,342
B)$43,529
C)$47,405
D)$48,000

Question

Quizplus · Accepted Answer

The present value of an annuity (a series of equal payments at regular intervals) can be calculated using the formula PV = PMT × [(1 - (1 + r)^-n) / r], where PV is the present value, PMT is the payment amount per period, r is the interest rate per period, and n is the total number of payments. Since the opportunity cost is 10% compounded annually, but payments are monthly, we convert the annual rate to a monthly rate (10% / 12 = 0.8333% per month or 0.008333 as a decimal) and the number of payments to 24 (2 years × 12 months). Plugging these values into the formula gives a present value of approximately $43,529, making option B the correct answer.

An Investment Pays $2,000 Every Month for 2 Years