Suppose you are offered the alternative of receiving either dollar3,000 at the e

ID: 2420982 • Letter: S

Question

Suppose you are offered the alternative of receiving either dollar3,000 at the end of five years of P dollars today. There is no question that the dollar3,000 will be paid in full. Because you have no current need for the money, you would deposit the P dollars in an account that pays 8percentagee interest. What value of P would be equivalent to dollar3,000 five years from now? (Assume the 8percentagee interest rate remains constantt.) P = F/(1+r)^n, where P is the dollars today, F is the dollars in future, r is the interest rate expressed as a decimal, and n is the number of years.

Explanation / Answer

Calculation of Present value (P) Equivalent to $3000 Five years from now:

Future value (F) =

$3,000

Interest rate (r) =

Number of years (n) =

Using the Equation : P = F / (1+r)^n

P = 3000 / (1+8%)^5

P = 3000 / (1.08)^5

P = 3000 / 1.469328

P = 2041.75

Hence P = $2041.75