Using an 8% rate, the present value today of receiving payments of 500, 600, and 700 at year 1, year 2, and year 3 respectively is closest to which amount?

Using an 8% rate, the present value today of receiving payments of 500, 600, and 700 at year 1, year 2, and year 3 respectively is closest to which amount?

• A. 1500
• B. 1533
• C. 1520
• D. 1600

Answer: (B)

This question tests valuing a stream of payments by discounting each amount back to today using the time value of money. At 8%, you bring each payment back by dividing by (1.08) raised to the number of years until receipt and then sum those present values. Compute each piece: - PV of 500 at year 1: 500 / 1.08 ≈ 462.96 - PV of 600 at year 2: 600 / (1.08)^2 = 600 / 1.1664 ≈ 514.40 - PV of 700 at year 3: 700 / (1.08)^3 = 700 / 1.259712 ≈ 555.68 Add them: 462.96 + 514.40 + 555.68 ≈ 1,533.04 The present value is about 1,533, which is the closest amount.

This question tests valuing a stream of payments by discounting each amount back to today using the time value of money. At 8%, you bring each payment back by dividing by (1.08) raised to the number of years until receipt and then sum those present values.

Compute each piece:

• PV of 500 at year 1: 500 / 1.08 ≈ 462.96

• PV of 600 at year 2: 600 / (1.08)^2 = 600 / 1.1664 ≈ 514.40

• PV of 700 at year 3: 700 / (1.08)^3 = 700 / 1.259712 ≈ 555.68

Add them: 462.96 + 514.40 + 555.68 ≈ 1,533.04

The present value is about 1,533, which is the closest amount.