Mary will receive $12,000 per year for the next 10 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent?
A) $120,000
B) $ 67,800
C) $ 38,640
D) $ 72,560

Question

Quizplus · Accepted Answer

To calculate the present value of the royalty income, we need to discount each year's payment by the opportunity cost of 12 percent. Using the present value formula for an annuity, where PMT is the annual payment, i is the interest rate, and n is the number of years:
PV annuity = PMT x [1 - (1 / (1 + i)^n)] / i

PV annuity = $12,000 x [1 - (1 / (1 + 0.12)^10)] / 0.12
PV annuity = $67,800

Therefore, the present value of her royalty income is $67,800. Choice B is the correct answer.

Mary Will Receive $12,000 Per Year for the Next 10