The present discounted value of a future payment can be calculated using which o

Question

The present discounted value of a future payment can be calculated using which of the following formulas?

A) [(1 + Interest rate) N] ÷ (Current payment).

B) (Current payment) ÷ [(1 + Interest rate) N].

C) [(1 + Interest rate) N] ÷ (Future payment).

D) (Future payment) ÷ [(1 + Interest rate) N].

2)

Suppose Carlos has a 60 percent chance of not collecting $100,000 when his rich uncle dies in 10 years. Juanita wants to buy the rights to this possible inheritance from Carlos. How much is the possible inheritance currently worth to Carlos? Assume the interest rate is 9 percent.

A- $94,695.

B- $25,345.

C- $16,896.

D- $142,042.

Explanation / Answer

1) Solution: (Future payment) ÷ [(1 + Interest rate) N].

Working: PV = FV * 1/(1 + i)n

2) Solution: $16,896

Working:

100,000 / (1+0.9)^10 = 42,247.57

(1-0.6) * $42,247.57 = 16,896

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