An investment pays you $20,000 at the end of this year,and $10,000 at the end of each of the four following years.What is the present value (PV)of this investment,given that the interest rate is 4% per year?

Question

Quizplus · Accepted Answer

We can use the formula for the present value of an annuity to calculate the PV of this investment:

PV = 20,000/(1+0.04) + 10,000/(1+0.04)^2 + 10,000/(1+0.04)^3 + 10,000/(1+0.04)^4 + 10,000/(1+0.04)^5

PV = 20,000/1.04 + 10,000/1.04^2 + 10,000/1.04^3 + 10,000/1.04^4 + 10,000/1.04^5

PV = 19,230.77 + 9,157.81 + 8,717.43 + 8,295.78 + 7,892.11

PV = 54,133.91

Therefore, the present value of this investment is $54,133.91. Thus, the best choice is (C).

An Investment Pays You $20,000 at the End of This