If the interest rate is 17%, and will remain 17% forever, how much would a rational investor be willing to pay for an asset that will pay him 7,020 dollars 1 year from now, 1,368 dollars 2 years from now, and nothing at any other time?

A) 7,000 dollars
B) 6,000 dollars
C) 41,176.47 dollars
D) 126,000 dollars
E) 8,000 dollars

Question

Valerie Vespucci · Accepted Answer

Final Answer : A, Explanation :  To find the present value of the future cash flows, we discount each payment back to the present value 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 payment of 7,020 dollars 1 year from now: PV = 7,020 / (1 + 0.17)^1 = 7,020 / 1.17 ≈ 6,000 dollars. For the payment of 1,368 dollars 2 years from now: PV = 1,368 / (1 + 0.17)^2 = 1,368 / 1.3689 ≈ 1,000 dollars. Adding these together gives a total present value of approximately 7,000 dollars.

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