You are considering an investment that will pay you $100 in Year 1, $500 in Year 2, $0 in Year 3 and $600 in Year 4. If you require a 12% return, what is the most you should pay for this investment today? (Round to nearest $)
A)$915
B)$869
C)$734
D)$698

Question

Quizplus · Accepted Answer

To find the present value of the investment, we need to discount each cash flow back to present value using the required rate of return of 12%. Using the present value formula, we get:
PV = $100/(1+0.12)^1 + $500/(1+0.12)^2 + $0/(1+0.12)^3 + $600/(1+0.12)^4
PV = $100/1.12 + $500/1.2544 + $0/1.4049 + $600/1.5735
PV = $89.29 + $398.94 + $0 + $381.07
PV = $869.30
Therefore, the most you should pay for this investment today is $869. Rounded to the nearest dollar, the answer is B: $869.

You Are Considering an Investment That Will Pay You $100