Ronald Slump purchased a real estate investment with the following end-of-year cash flows:
What is the present value of these cash flows if the appropriate discount rate is 20%?

Question

Ronald Slump purchased a real estate investment with the following end-of-year cash flows: 
What is the present value of these cash flows if the appropriate discount rate is 20%?

Quizplus · Accepted Answer

Using the formula for present value of an annuity, we get: PV = (500/(0.2))*(1 - 1/(1+0.2)^5) = $133. If the discount rate is 20%, the present value is less than the sum of the cash flows, as the cash flows are discounted at a high rate. Option C is therefore the correct answer.

Ronald Slump Purchased a Real Estate Investment with the Following