Fang has the opportunity to buy an investment that pays $500 at the end of each of the next two years. If interest rates are 6.5%, what is the maximum price that Fang should pay for this investment?

Question

Quizplus · Accepted Answer

The maximum price Fang should pay is the present value of the future cash flows. Using the formula for present value, PV = C1 / (1+r)^1 + C2 / (1+r)^2, where C1 and C2 are the cash flows in years 1 and 2, respectively, and r is the interest rate. Substituting the given values, PV = $500 / (1+0.065)^1 + $500 / (1+0.065)^2 = $469.48 + $440.83 = $910.31.

Fang Has the Opportunity to Buy an Investment That Pays