Final answer:
The present value of an asset that yields $500 in five years and $1000 in ten years at a 6% discount rate is calculated using the present value formula. After computing each cash flow separately, their present values are summed to yield a total present value of $932.02.
Step-by-step explanation:
The present value of an asset is the current worth of a future sum of money, given a specified rate of return. To calculate the present value of cash flows $500.00 in five years and $1000.00 in ten years with a discount rate of 6%, we use the formula:
PV = FV / (1 + r)^n
Where:
- PV is the present value
- FV is the future value of the money
- r is the discount rate
- n is the number of years until the payment is received
For the $500.00 due in five years:
PV = $500.00 / (1 + 0.06)^5
For the $1000.00 due in ten years:
PV = $1000.00 / (1 + 0.06)^10
Now, calculating these:
PV = $500.00 / (1.3382) = $373.63
PV = $1000.00 / (1.7908) = $558.39
The total present value is the sum of both these present values:
Total PV = $373.63 + $558.39 = $932.02
Therefore, the correct answer is B. $932.02.