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?

Question

Quizplus · Accepted Answer

We can use the present value formula: 
PV = CF / (1 + r)^n 
where CF is the cash flow, r is the discount rate (opportunity cost), and n is the number of periods.

In this case, CF = $12,000 per year for 10 years, r = 12%, and n = 10. 
PV = $12,000 / (1 + 0.12)^1 + $12,000 / (1 + 0.12)^2 + ... + $12,000 / (1 + 0.12)^10 
PV = $67,800

Therefore, the present value of Mary's royalty income is $67,800.

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