Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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![**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**.](https://content.bartleby.com/qna-images/question/b6ea49f2-aec0-47e4-ae21-0e0a47907cd1/54bc5f6d-d077-4460-abf0-cb768c7ed157/gi55jaj_processed.png)
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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- Assume an investment is priced today at $5,000 and has the following income stream: Year Cash Flow 1 123 2 3 4 $ 1,000 - 2,000 3,000 3,000 Would an investor with a required rate of return of 15 percent be wise to invest at a price of $5,000? Multiple Choice No, because the investment has a net present value of - $1,139.15. No, because the investment has a net present value of - $1,954.91. Yes, because the investment has a net present value of $1,069.66. Yes, because the investment has a net present value of $1,954.91. An investor would be indifferent between purchasing and not purchasing the above investment at the stated price.arrow_forwardj. Find the PV and the FV of an investment that makes the following end-of-year payments. The interest rate is 10%. Payment $100 $300 $500 Year 1 2 3 Round your answers to the nearest cent. PV of investment: $ FV of investment: $arrow_forwardman.5arrow_forward
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