Question

P=$150(1-1/1.03)^10/0.03

The equation above gives the present value,P, of an investment that pays the investor $150 per year for1010years. The present value is the dollar amount that is equal to the series of future payments. If the payments are changed from $150 to $75, what is the effect on the present valueP?

a. the present value stays the same
b. the present value is halved
c. the present value doubles
d. the present value increases by 3%

Answer 1

Answer: b. the present value is halved

Step-by-step explanation:

The present value of the investment is based on several things including the future payments. If these payments were to be halved from $150 to $75, the entire present value would be halved as well.

Present Value= 150 * (( 1 - (1 / 1.03) ) ^10) / 0.03

= $1,279.53

Present Value = 75 * (( 1 - (1 / 1.03) ) ^10) / 0.03

= $639.77

Notice how the present value when the payments are $75 is half that of the present value at $150.