Use the table below to answer the following question: If an investment pays you

Question

Use the table below to answer the following question:

If an investment pays you $5,000 every 6 months for 3 years, what is its present value?       

Select one:

a. $23,814

b. $26,277

c. $26,277

d. $27,308

Present Value of 1 Present Value of an Annuity of 1 Period 4.0% 8.0% 4.0% 8.0% 1 0.9623 0.9259 0.9623 0.9259 2 0.9259 0.8573 1.8882 1.7833 3 0.8910 0.7938 2.7791 2.5771 4 0.8573 0.7350 3.6365 3.3121 5 0.8250 0.6806 4.4615 3.9927 6 0.7938 0.6302 5.2553 4.6229 Assumption: Required effective annual rate of return is 8.0%.

Explanation / Answer

Tenure = 3 year

Since payment id paid semiannually so total number of payment = 6

Annual interest rate = 8%

So Semiannual interest rate = 4%

Investment value = $5,000

Check the value of multiply factor for 4% interest rate for 6 period.

Multiplying factor = 5.2553

So present value of payment = $5,000 × 5.2553

                                              = $26,275

So present value is $26,275

Hence, option (C) is correct answer.

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