An investment pays $400 in one year, X amount of dollars in two years, and $500 in 3 years. The total present value of all the cash flows (including X) is equal to $1500. If i is 6%, what is X?

Question

Quizplus · Accepted Answer

We can use the formula for the present value of an annuity to find X: PV = X/1.06^2. We can also use the formula for the present value of a single sum to find the sum of the $400 and $500 payments in present value terms: 400/1.06 + 500/1.06^3 = 789.70. Therefore, the equation for the total present value of all the cash flows becomes: PV = 789.70 + X/1.06^2. Solving for X, we get X = (1500 - 789.70*1.06^2 - 400/1.06 - 500/1.06^3)*1.06^2 = $789.70. Therefore, the best choice is C.

An Investment Pays $400 in One Year, X Amount of Dollars