You own a contract that promises an annuity cash flow of $100 beginning-of-the-year cash flows for each of the next three years (note: the first cash flow is today).At an interest rate of 10%,what is the present value of this contract?
A)$248.69
B)$273.55
C)$331.00
D)$364.10

Question

Quizplus · Accepted Answer

To calculate the present value (PV) of the contract, we can use the formula:
PV = (C / (1 + r)^n) + (C / (1 + r)^(n-1)) + ... + (C / (1 + r)^1), where C is the cash flow, r is the interest rate, and n is the number of periods.

In this case, C = $100, r = 10%, and n = 3. Plugging in the values, we get:
PV = ($100 / 1.1) + ($100 / 1.1^2) + ($100 / 1.1^3) = $90.91 + $82.64 + $75.13 = $248.69

Therefore, the best choice is B.

You Own a Contract That Promises an Annuity Cash Flow