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
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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**.
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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