If Bill wants to receive $1,000 in one year,$2,000 in two years,and $3,000 in three years,for a discount rate of 5%,how much money does he have to save today?

Question

Quizplus · Accepted Answer

Bill needs to calculate the present value of each future payment, and then add them to find the total amount he needs to save today. Using the formula for present value of a future payment, we get:
PV of $1,000 in one year = $1,000/(1+0.05)^1 = $952.38
PV of $2,000 in two years = $2,000/(1+0.05)^2 = $1,822.70
PV of $3,000 in three years = $3,000/(1+0.05)^3 = $2,579.87
Adding these present values together, we get:
$952.38 + $1,822.70 + $2,579.87 = $5,355.95
Therefore, Bill needs to save $5,357.95 today to have enough money to receive the three future payments at a discount rate of 5%. The answer is B.

If Bill Wants to Receive $1,000 in One Year,$2,000 in Two