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joja [24]
3 years ago
6

Calculate the present value of the following sequence of willingness to pay: $150 this year; $150 next year; $150 in year 2, and

$50 in year 3. Use a 5% discount rate. Recalculate using an 3% discount rate. Show your work. What is the effect of using a lower discount rate on the present value of the stream of willingness to pay
Business
1 answer:
goldenfox [79]3 years ago
7 0

Answer:

$472.10

$482.78

decreasing the discount rate increases the present value of the willingness to pay

Explanation:

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 0 - 2 = $150

Cash flow in year 3 = $50

PV when I is 5% = 472.10

PV when I is 3% = 482.78

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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