(Ignore income taxes in this problem.) Henry wants to send his son to computer school which will start one year from today. Payments of $2,000 are due at the end of each of the next two years. What lump-sum will Henry have to invest now at 12% per year in order to have $2,000 at the end of each of the next two years?
A) $4,240
B) $3,380
C) $1,594
D) $2,508

Question

Quizplus · Accepted Answer

To find the lump-sum that Henry needs to invest now, we need to find the present value of the future payments of $2,000, discounted at a rate of 12% per year.

We can use the formula for present value of an annuity:

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

where PV is the present value, Payment is the payment each period, r is the interest rate per period, and n is the number of periods.

In this case, Payment is $2,000, r is 12% per year, and n is 2 (two years).

So,

PV = $2,000 x [1 - (1 + 0.12)^(-2)] / 0.12
   = $3,380.20

Therefore, the lump-sum that Henry needs to invest now is $3,380.20, which is closest to option B, $3,380.

(Ignore Income Taxes in This Problem