Other things equal,a person with a cosmetician's certificate from a vocational school will earn $4,000 more per year than a person without one,starting the year the certificate is received.But after 6 years,the difference in income will disappear because styles have changed.If the interest rate is 5 percent (0.05)per year,what is the present value of having just received a certificate? (Assume that each year's income is received at the end of the year. )

Question

Quizplus · Accepted Answer

Using the formula for present value of an annuity:

PV = C[(1-(1+i)^-n)/i]

where PV is the present value, C is the annual cash flow, i is the interest rate, and n is the number of years.

Let C = $4,000, i = 0.05, and n = 6. We can find the present value of the cash flows as follows:

PV = 4,000[(1-(1+0.05)^-6)/0.05]
PV = $21,317.91

Therefore, the present value of having just received a certificate is $21,317.91, option A is correct.

Other Things Equal,a Person with a Cosmetician's Certificate from a Vocational