What is the present value (PV) of an investment that will pay $600 in one year's time, and $600 every year after that, when the interest rate is 12%? ..... A. $5,000 O B. $3,000 C. $2,500 D. $4,000
What is the present value (PV) of an investment that will pay $600 in one year's time, and $600 every year after that, when the interest rate is 12%? ..... A. $5,000 O B. $3,000 C. $2,500 D. $4,000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
![**Question:**
What is the present value (PV) of an investment that will pay $600 in one year's time, and $600 every year after that, when the interest rate is 12%?
**Options:**
- A. $5,000
- B. $3,000
- C. $2,500
- D. $4,000
**Explanation:**
This question involves calculating the present value of a perpetuity that begins with a first payment of $600 after one year. The perpetuity formula is:
\[ \text{PV} = \frac{C}{r} \]
where \( C \) is the annual cash flow ($600) and \( r \) is the interest rate (12% or 0.12).
Let's calculate:
\[ \text{PV} = \frac{600}{0.12} = 5,000 \]
Therefore, the correct answer is **A. $5,000**.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb6ea49f2-aec0-47e4-ae21-0e0a47907cd1%2F54bc5f6d-d077-4460-abf0-cb768c7ed157%2Fgi55jaj_processed.png&w=3840&q=75)
Transcribed Image Text:**Question:**
What is the present value (PV) of an investment that will pay $600 in one year's time, and $600 every year after that, when the interest rate is 12%?
**Options:**
- A. $5,000
- B. $3,000
- C. $2,500
- D. $4,000
**Explanation:**
This question involves calculating the present value of a perpetuity that begins with a first payment of $600 after one year. The perpetuity formula is:
\[ \text{PV} = \frac{C}{r} \]
where \( C \) is the annual cash flow ($600) and \( r \) is the interest rate (12% or 0.12).
Let's calculate:
\[ \text{PV} = \frac{600}{0.12} = 5,000 \]
Therefore, the correct answer is **A. $5,000**.
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