You will receive $4,500 three years from now. The discount rate is 13 percent. a

Question

You will receive $4,500 three years from now. The discount rate is 13 percent.

a. What is the value of your investment two years from now? Multiply $4,500 × .885 (one year’s discount rate at 13 percent). (Round your answer to 2 decimal places.)
  

b. What is the value of your investment one year from now? Multiply your rounded answer to part a by .885 (one year’s discount rate at 13 percent). (Round your answer to 2 decimal places.)
  

c. What is the value of your investment today? Multiply your rounded answer to part b by .885 (one year’s discount rate at 13 percent). (Round your answer to 2 decimal places.)
  

Explanation / Answer

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

a.

4500=P(1.13)

P=$4500/1.13

=$4500*0.885

=$3982.50

b.

3982.5=P*(1.13)

P=$3982.5/1.13

=$3982.5*0.885

=$3524.51(Approx)

c.

3524.51=P*(1.13)

P=3524.51/1.13

=3524.51*0.885

=$3119.19(Approx).

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