If the interest rate is 17%, and will remain 17% forever, how much would a rational investor be willing to pay for an asset that will pay him 7,020 dollars 1 year from now, 1,368 dollars 2 years from now, and nothing at any other time?
A)7,000 dollars
B)6,000 dollars
C)41,176.47 dollars
D)126,000 dollars
E)8,000 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 payment of 7,020 dollars 1 year from now: PV = 7,020 / (1 + 0.17)^1 = 7,020 / 1.17 ≈ 6,000 dollars. For the payment of 1,368 dollars 2 years from now: PV = 1,368 / (1 + 0.17)^2 = 1,368 / 1.3689 ≈ 1,000 dollars. Adding these together gives a total present value of approximately 7,000 dollars.

If the Interest Rate Is 17%, and Will Remain 17