Question

Your grandparents offer you $500 in one year. Assuming no inflation, if the interest rate is 10%, you areindifferent between their gift in one year and _____ today.A. $450B. $500C. $454.55D. $550E. $413.22

Answer 1

Answer:

PV=454.54

Explanation:

This problem can be solved applying the concept of future value, the 500 represents money in the future an the 10% is how that money is valued over time

$FV=PV*(1+i)^{n}$

where FV is future value, PV is the present value, i is the periodic interest rate and n is the number of periods. So applying to this particular problem we have:

$500=PV*(1+0.1)^{1}$

solving for PV we have:

PV=454.54