A project yields a net income of $200 a year for 4 years and nothing afterwards. With a discount rate of 5 per cent, what is the discounted value of the total income stream over the 4 years?
Correct answer A. More than zero but less than 800
Explanation
Discounting each $200 at 5 per cent gives about 190 + 181 + 173 + 165, roughly $709, which is positive but less than the undiscounted total of $800.
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