Question

You just won a prize that will pay you $800 today and $500 a year for the next three years. Which is the correct formula for computing the present value as of today at 6 percent?

a. PV = $500/1.06 + $500/1.062+ $500/1.063
b. PV = $800 PV $800/1.06$500/1.06+$500/1.06 $500/1.06
c. PV =$800+ $500/1.06 $500/1.06+ $500/1.061
d. PV = $800(1.06)+ $500 +$500/1.06 $500/1.06

Answer 1

Total PV= 800 + 500/1.06^1 + 500/1.06^2 + 500/1.06^3

Step-by-step explanation:

Giving the following information:

Cash flows:

Cf0= $800

Cf1= $500

Cf2= $500

Cf3= $500

Discount rate= 6%

The $800 is received today, therefore, it is already its present value.

For the cash flow for the next three years, we need to use the following formula on each cash flow.

PV= FV/(1+i)^n

Total PV= 800 + 500/1.06 + 500/1.06^2 + 500/1.06^3