If the interest rate is 10% and you will receive $2000 next year and $3000 in three years, what is the present value?
A)$5000.
B)$6000.
C)$5500.
D)$4075.
E)none of the above.

Question

Quizplus · Accepted Answer

Using the present value formula, we have:

PV = CF1 / (1+r)^1 + CF2 / (1+r)^2

where PV is the present value, CF1 is the cash flow in one year, CF2 is the cash flow in three years, and r is the interest rate.

Substituting the values:

PV = 2000 / (1+0.1)^1 + 3000 / (1+0.1)^3

PV = 2000 / 1.1 + 3000 / 1.331

PV = 1818.18 + 2252.25

PV = 4070.43

Therefore, the present value is $4070.43, which is closest to choice D ($4075).

If the Interest Rate Is 10% and You Will Receive