A year from today, Pamela Oliver is scheduled to receive $32,000 payment from a
ID: 2793375 • Letter: A
Question
A year from today, Pamela Oliver is scheduled to receive $32,000 payment from a trust fund her father established. She wants to buy a car today but does not have the money. A friend has agreed to give Pamela the present value of the $32,000 today if she agrees to give him the full $32,000 when she collects it one year from now. They agree that 8 percent reflects a fair discount rate.
Round your computations to the nearest whole dollar.
You have been asked to determine the present value of the future cash flow. Use a present value table to determine the amount of cash the Pamela’s friend should give her.
Use an algebraic to verify the results you determined in requirements.
Explanation / Answer
As per PV table, PV of $ 1, 8 %, 1 year = 0.92593
PV of $ 32,000 = $ 32,000 x 0.92593 = $ 29,629.76 or $ 29,630
Alternatively,
Present value, PV = FV/(1+i)n
Future value, FV = $ 32,000
Interest rate, i = 8 % or 0.08
No. of compounding period = 1
PV = $ 32,000/(1 + 0.08)
= $ 32,000/(1.08)
= $ 29,629.63 or $ 29,630
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