You own a contract that promises an annuity cash flow of $100 year-end cash flows for each of the next three years (note: the first cash flow is exactly one year from today).At an interest rate of 10%,what is the present value of this contract?
A)$248.69
B)$273.55
C)$331.00
D)$364.10

Question

Quizplus · Accepted Answer

To calculate the present value of this contract, we need to discount each cash flow back to its present value and then sum them up. Using a discount rate of 10%, we can calculate the present value of each cash flow as follows:

Year 1: $100 / (1 + 0.10)^1 = $90.91
Year 2: $100 / (1 + 0.10)^2 = $82.64
Year 3: $100 / (1 + 0.10)^3 = $75.13

Then, we sum up these present values to get the total present value of the cash flows:

$90.91 + $82.64 + $75.13 = $248.69

Therefore, the best choice is A) $248.69.

You Own a Contract That Promises an Annuity Cash Flow