To settle a debt you have agreed to make payments of $200, $500, $700, $900, and $1,200 at the end of years 1- 5 respectively. The appropriate discount rate is 8%. What is the present value of your debt?
A) $2,427
B) $3,500
C) $2,100
D) $2,648

Question

Quizplus · Accepted Answer

The present value (PV) of a series of future payments can be calculated by discounting each payment back to the present value using the formula PV = FV / (1 + r)^n, where FV is the future value of the payment, r is the discount rate, and n is the number of periods until the payment is made. For this question, we calculate the present value of each payment individually and then sum them up:1. $200 / (1 + 0.08)^1 = $185.192. $500 / (1 + 0.08)^2 = $427.073. $700 / (1 + 0.08)^3 = $552.314. $900 / (1 + 0.08)^4 = $649.935. $1,200 / (1 + 0.08)^5 = $832.39Adding these amounts together gives us a total present value of $2,647.89, which rounds to $2,648.

To Settle a Debt You Have Agreed to Make Payments