If the interest rate is 5% and will remain 5% forever, how much would a rational investor be willing to pay for an asset that will pay him 6,300 dollars 1 year from now, 1,102 dollars 2 years from now, and nothing at any other time?
A)7,000 dollars
B)6,000 dollars
C)140,000 dollars
D)42,000 dollars
E)8,000 dollars

Question

Quizplus · Accepted Answer

The present value of the asset is calculated by discounting each cash flow at the interest rate of 5%. The present value of $6,300 received in 1 year is $6,300 / (1 + 0.05) = $6,000. The present value of $1,102 received in 2 years is $1,102 / (1 + 0.05)^2 = $1,000. The total present value is $6,000 + $1,000 = $7,000.

If the Interest Rate Is 5% and Will Remain 5