Asked by connor Xiong on Jun 10, 2024
Verified
Calculate the amount today that is equivalent to $150 at the end of year 1, $450 at the end of year 2, and $300 at the end of year 3, given a discount rate of 10%.
A) $695
B) $710
C) $755
D) $734
E) $1,100
Discount Rate
The discount rate is the interest rate used in discounted cash flow analysis to determine the present value of future cash flows.
- Evaluate the present valuation of future financial inflows for investment opportunity analysis.
Verified Answer
AB
Auriel BeattyJun 14, 2024
Final Answer :
D
Explanation :
We need to calculate the present value of each amount and then sum them up. Using the formula to calculate the present value of a future amount:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.
PV(Y1) = $150 / (1 + 0.1)^1 = $136.36
PV(Y2) = $450 / (1 + 0.1)^2 = $330.58
PV(Y3) = $300 / (1 + 0.1)^3 = $220.47
Therefore, the total present value is:
PV(total) = $136.36 + $330.58 + $220.47 = $687.41
The closest answer choice to this amount is D) $734, which is the best choice.
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.
PV(Y1) = $150 / (1 + 0.1)^1 = $136.36
PV(Y2) = $450 / (1 + 0.1)^2 = $330.58
PV(Y3) = $300 / (1 + 0.1)^3 = $220.47
Therefore, the total present value is:
PV(total) = $136.36 + $330.58 + $220.47 = $687.41
The closest answer choice to this amount is D) $734, which is the best choice.
Learning Objectives
- Evaluate the present valuation of future financial inflows for investment opportunity analysis.
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