Quick finance ques 10 pts!!!!!!!!!!!!!!!!!!?

Question

At the end of each year for the next ten years you will receive cash flows of $100. If the appropriate discount rate is 7%, how much would you pay for this investment?

a. $508.35

b. $702.36

c. $491.65

d. $351.20

e. None of the Above

Answer 1

At first i thought b, and thats what everyone else is saying too but then i thought e, because 7% of $702.36 is $49.17

however im not sure if thats how you would work out the answer coz i dont think i totally understand the question.

Answer 2

E

Answer 3

b

Answer 4

The answer is B.

You're going to have to pay $702.36 today for the right to $700 a year for the next 10 years, discounted at 7%.

Here's the interesting part - if you were buying the right to $700 a year for the next 20 years discounted at 7%, you wouldn't pay twice as much as the 10-year price of $702.36, you'd pay $1059.40, just about 35% more. It shows how distant-future cash flows are not as valuable as cash flows that you get closer to today.

Fun with discounting...