The present value of receiving M dollars two years from now when the prevailing interest rate is i is equal to

Question

Quizplus · Accepted Answer

The present value of receiving an amount in the future is calculated using the formula PV = FV/(1+i)^n, where PV is present value, FV is future value, i is interest rate, and n is the number of years. In this case, the future value is M dollars received two years from now, so n=2. Thus, PV = M/(1+i)^2. However, the question also includes a factor of (1 + i)² in the answer choices, which is equivalent to 1/(1+i)^2. Multiplying both sides of the equation by this factor, we get PV*(1+i)^2 = M, which simplifies to PV = M/(1+i)^2 * 1/(1+i)^(-2) = M/(1+i)². Therefore, the correct answer is E.

The Present Value of Receiving M Dollars Two Years from Now