Question

Assume ABC Corp. will earn $550 this year, $500 one year from now, $600 two years from now, $800 three years from now, $800 four years from now, and $1,000 five years from now. Assuming the interest rate of 15.4% and that it will compound annually, what will be the total present value of ABC Corp.’s earnings?

Group of answer choices

$2,957.28

$2,897.94

$2,894.10

$2,906.53

Answer 1

Answer:

Cash Flow in Year 0 = $550
Cash Flow in Year 1 = $500
Cash Flow in Year 2 = $600
Cash Flow in Year 3 = $800
Cash Flow in Year 4 = $800
Cash Flow in Year 5 = $1,000

Interest rate = 15.4%

Present Value = $550 + $500/(1+0.154)^1 + $600 / (1 + 0.154)^2 + $800 / (1 + 0.154)^3 + $800 / (1 + 0.154)^4 + $1,000 / (1 + 0.154)^5
Present Value = $550 + $500/(1.154)^1 + $600 / (1.154)^2 + $800 / (1.154)^3 + $800 / (1.154)^4 + $1,000 / (1.154)^5
Present Value = $550 + $433.28 + $450.55 + $520.56 + $451.09 + $488.62
Present Value = $2,894.10