Question

Assuming that an investor requires a 10% annual yield over the next twelve years, how much would she be willing to pay for the right to receive $20,000 at the end of year 12?

Answer 1

Answer:

the present value is $6,372.62

Explanation:

The computation of the amount that willing to pay is shown below

As we know that

Future value = Present value × (1 + rate of interest)^number of years

$20,000 = Present value × (1 + 0.10)^20

$20,000 = Present value × 3.13842837

So, the present value is

= $20,000 ÷  3.13842837

= $6,372.62

hence, the present value is $6,372.62

We simply applied the above formula so that the correct value could come

And, the same is to be considered