Question

Your boss leaves you a note, asking you to determine the present value of a $1,200,000 payment to be made in six years assuming a discount rate of 18%. However, you misread her handwriting, and mistakenly thought the discount rate you were supposed to use was 8%. What is the dollar value of the mistake in your answer because you used the wrong discount rate?

Answer 1

Answer:

so value of the mistake is $311685.71

Explanation:

given data

present value = $1,200,000

time = 6 year

discount rate = 18%

discount rate = 8%

to find out

What is the dollar value of the mistake

solution

we get here present value that is express as for both rate that is

present value = $\frac{FV}{(1+r)^t}$

put here value

present value =  $\frac{1200000}{(1+0.18)^6}$

present value 1 = $444517.85

and

present value =  $\frac{1200000}{(1+0.08)^6}$

present value 2 = $756203.55

so

difference is $756203.55 - $444517.85

difference is = $311685.71

so value of the mistake is $311685.71