If the interest rate is 18%, and will remain 18% forever, how much would a rational investor be willing to pay for an asset that will pay him 9,440 dollars 1 year from now, 1,392 dollars 2 years from now, and nothing at any other time?
A)9,000 dollars
B)171,000 dollars
C)8,000 dollars
D)50,000 dollars
E)10,000 dollars

Question

Quizplus · Accepted Answer

To find the present value of the future cash flows, we discount each payment back to the present using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. For the 9,440 dollars 1 year from now, PV = 9440 / (1 + 0.18)^1 = 8000. For the 1,392 dollars 2 years from now, PV = 1392 / (1 + 0.18)^2 = 1000. Adding these together, 8000 + 1000 = 9000 dollars.

If the Interest Rate Is 18%, and Will Remain 18