Peregrine consumes ($700, $880)and earns ($600, $990).If the interest rate is 0.10, the present value of his endowment is
A)$1,590.
B)$1,500.
C)$1,580.
D)$3,150.
E)$3,750.

Question

Quizplus · Accepted Answer

The present value of Peregrine's endowment is calculated by adding the current earnings of $600 to the present value of future earnings of $990 discounted by the interest rate of 0.10. The present value of the future earnings is $990 / (1 + 0.10) = $900. Therefore, the total present value is $600 + $900 = $1,500.

Peregrine Consumes ($700, $880)and Earns ($600, $990)