Paul would like to buy a consol promising an interest rate of 8 percent and paying $90 annually. Paul should not pay more than $__________ for the console.
A) 90
B) 1,000
C) 1,125
D) 900

Question

Quizplus · Accepted Answer

To calculate the maximum price Paul should pay for the console, we need to use the formula for present value of an annuity:

PV = Payment * [1 - (1 + r)^(-n)] / r

where PV is the present value, Payment is the annual payment, r is the interest rate, and n is the number of years.

Plugging in the given values, we get:

PV = 90 * [1 - (1 + 0.08)^(-1)] / 0.08
PV = 90 * (1 - 0.9259) / 0.08
PV = $1,125

Therefore, Paul should not pay more than $1,125 for the console, so the answer is (C).

Paul Would Like to Buy a Consol Promising an Interest