PV of multiple cash flows: Jack Stuart has loaned money to his brother at an interest rate of 5.75 per cent. He expects to receive $625, $650, $700, and $800 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

We can use the PV (present value) formula to solve for the amount Jack loaned out to his brother:
PV = CF1/(1 + r)^1 + CF2/(1 + r)^2 + CF3/(1 + r)^3 + CF4/(1 + r)^4
where:
CF1 = $625
CF2 = $650
CF3 = $700
CF4 = $800
r = 5.75%
Plugging in these values, we get:
PV = $625/(1 + 0.0575)^1 + $650/(1 + 0.0575)^2 + $700/(1 + 0.0575)^3 + $800/(1 + 0.0575)^4
PV = $2,404 (rounded to nearest dollar)
Therefore, the best choice is C, $2,404.

PV of Multiple Cash Flows: Jack Stuart Has Loaned Money