You Just won a prize that will pay you $800 today and $500 a year for the next three years. Which is the correct formula for computing the present value as of today at 6 percent?

PV = $500/1.06 + $500/1.062 + $500/1.063

PV = $800 PV $800/1.06$500/1.06+$500/1.06 $500/1.06

PV = $800 + $500/1.06 $500/1.06 + $500/1.061

PV = $800 (1.06) + $500 + $500/1.06 $500/1.06

The correct answer is PV = $800 + $500/1.06 + $500/1.062 + $500/1.06^3

Explanation:

Solution

Given that:

A price was wan by you today at = $800

For the next three years = $500 a year

Now

We compute for the present value of today at 6%

Thus

Present value (PV) = $800 + $500/1.06 + $500/1.062 + $500/1.063

Because $800 is receivable today, its present value is equal to $800,

So,

500 receivable after a year will be divided by 1.06

PV = $800 + $500/1.06 + $500/1.062 + $500/1.06^3

Therefore the right formula for computing the present value as of today at 6 percent is PV = $800 + $500/1.06 + $500/1.062 + $500/1.06^3