(Present value) What is the present value of the following future amounts? a. $800 to be received 10 years from now discounted b
1 answer:
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Answer:
The correct answer for 1st option is $158,206.95 and for 2nd option is $157,733.11.
Explanation:
According to the scenario, the given data are as follows:
1st option
Payment ( PMT ) = $85,000
Interest rate (I) = 7%
Time (N) = 2 years
So, the effective rate of interest can be calculated as :
R =
R = 7.2290%
Present value can be calculated by using following formula:
P = PMT x (((1-(1 + r) ^- n)) / i)
Hence, present value of 1st option can be calculated as:
PV = 85000×((1-(1 + 7.229%) ^- 2) / 7%)
PV = $158,206.95
Now, present value of 2nd option can be calculated as:
Payment = $74,000
Bonus = $20,000
So, PV = 74000×((1-(1 + 7.229%) ^- 2) / 7%)
PV = 137,733.11
Bonus (add) = $20,000
Total PV = $157,733.11
Hence, the present value for 1st option is $158,206.95 and for 2nd option is $157,733.11.