Question

Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam’s opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today? Use a financial calculator to determine the amount.​
a. ​$23,089
b. ​$25,526
​c. $26,888
​d. $28,685
​e. $30,534

Answer 1

Answer:

a) The Maximum Liam should be willing to pay is $23,089

Explanation:

The maximum amount Liam should be willing to pay for the investment is the present value of the future amount of 52,000  discounted at 7%.

The present value of a future sum is its worth in today's terms.This represents how much Liam should be offered now to make him  indifferent about the choice of receiving $52,000 in the future.

For example, It is the amount that should be invested today at 7% to become $52,000 in 12 years time.

The present value (PV) of a future sum (FV) can be ascertained using the formula below:

PV = FV × (1+r)^(-n)

PV = 52,000× (1+0.07)^(-12)

        = 52,000×0.4440

      = 23,088.62

      = $23,089

The Maximum Liam should be willing to pay is $23,089