If the interest rate is 6% and will remain 6% forever, how much would a rational investor be willing to pay for an asset that will pay him 8,480 dollars 1 year from now, 1,123 dollars 2 years from now, and nothing at any other time?
A)9,000 dollars
B)63,000 dollars
C)150,000 dollars
D)8,000 dollars
E)10,000 dollars

Question

Quizplus · Accepted Answer

To find the present value of the future cash flows, we discount each payment back to the present value using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. For the $8,480 payment 1 year from now: PV = 8480 / (1 + 0.06)^1 = 8000. For the $1,123 payment 2 years from now: PV = 1123 / (1 + 0.06)^2 ≈ 1000. Adding these together gives $9,000.

If the Interest Rate Is 6% and Will Remain 6