Question

select the correct answer.

ben sold his small online business for $100,000. the purchaser will pay him $20,000 today, then $20,000 every year for the next four years. assume that ben could invest a lump-sum payment today in an account yielding an interest rate of 4% annually. find the total present value of all five payments.

$87,096
$88,384
$92,598
$93,964

Explanation:

Identify the payment structure

The payments consist of five installments of \$20,000 each:

• \$20,000 today (at \(t = 0\))
• \$20,000 at the end of Year 1 (at \(t = 1\))
• \$20,000 at the end of Year 2 (at \(t = 2\))
• \$20,000 at the end of Year 3 (at \(t = 3\))
• \$20,000 at the end of Year 4 (at \(t = 4\))

Calculate the present value of each payment

Using the Present Value Calculation knowledge point

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Sum the present values

Summing the individual present values:

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Rounding to the nearest dollar gives \$92,598.

Answer:

• (A) $87,096
• (B) $88,384
• (C) $92,598 (Correct answer)
• (D) $93,964