An investor pays 100,000 today for a 4-year investment that returns cash flows of 60,000 at the end of each of years 3 and 4. The cash flows can be reinvested at 4.0% per annum effective.

Using an annual effective interest rate of 5.0%, calculate the net present value of this investment today.

• –1,398
• –699
• 699
• 1,398
• 2,629

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

Solution: C.

The first cash flow of 60,000 at time 3 earns 2400 in interest for a time 4 receipt of 62,400. Combined with the final payment, the investment returns 122,400 at time 4. The present value is 122,400(1.05)^-4 = 100, 699. The net present value is 699.

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.