Question

Pam is in need of cash right now and wants to sell the rights to a $1,000 cash flow that she will receive 5 years from today. If the discount rate for such a cash flow is 9.5%, then what is the fair price that someone should be willing to pay Pam today for rights to that future cash flow?

Answer 1

Answer:

Fair price =$635.23

Explanation:

Th fair price that he should be willing to pay is the present value of the $1000 expected in 5 years time.

Present value (PV) is the worth today if a future amount is discounted at a particular rate of interest.

PV = FV × (1+r)^(-n)

PV - present value = ?

FV -Future value - 1000,

r- discount rate - 9.5%,

n - future date - 5

PV = 1,000 × (1.0950^(-5)

PV = 1,000 × 0.6352

PV =635.2276653

Fair price =$635.23