Question

Present value​ (with changing interest​ rates). Marty has been offered an injury settlement of ​$12 comma 000 payable in 3 years. He wants to know what the present value of the injury settlement is if his opportunity cost is 5​%. ​ (The opportunity cost is the interest rate in this​ problem.) What if the opportunity cost is 6.5​%? What if it is 11.5​%?

Answer 1

Answer:

If opportunity cost is 5%, PV=10,366.05

If opportunity cost is 6.5%, PV=9,934.19

If opportunity cost is 11.5%, PV=8,656.79

Explanation:

PV=Σ$(\frac{CF_{t} }{(1+i)^{t} })$

If opportunity cost is 5%: PV = $\frac{12,000 }{(1+0.05)^{3} }$ =10,366.05

If opportunity cost is 6.5%: PV = $\frac{12,000 }{(1+0.065)^{3} }$ =9,934.19

If opportunity cost is 11.5%: PV = $\frac{12,000 }{(1+0.115)^{3} }$ =8,656.79