A new business opportunity has a 70% chance of being worth $500,000 next year and a 30% chance of being worth $100,000. The appropriate expected rate of return is 10%.
-Refer to the information above. What is the present value of this investment? Round your answer to the nearest dollar.
A)$454,545
B)$345,455
C)$200,000
D)$272,727

Question

Quizplus · Accepted Answer

To find the present value, we need to calculate the weighted average of the two possible outcomes:
PV = 0.7($500,000) / (1 + 0.1) + 0.3($100,000) / (1 + 0.1) = $345,454.55
Therefore, the best choice is B. To calculate the present value, we need to take the weighted average of the two possible outcomes:

Present value = 0.7 × ($500,000/(1+0.1)) + 0.3 × ($100,000/(1+0.1))

Present value = $345,454.55

Therefore, the best choice is B as it gives the present value of the investment.

A New Business Opportunity Has a 70% Chance of Being