Your uncle wants to help you with your college expenses, and he promised to pay you $10,000 next year and $15,000 in two years. The current interest rate is 6%, and you expect that this interest rate will be the same for the next year and will increase to 8% in the year after. What is the formula that you should use to compute the present discounted value of your uncle's contribution to your education expenses?

Question

Quizplus · Accepted Answer

The formula for computing the present value of future cash flows is PV = CF/(1+r)^n, where PV is the present value, CF is the future cash flow, r is the discount rate, and n is the number of periods. In this case, we can use this formula to calculate the present value of the $10,000 payment next year and the $15,000 payment in two years. Using a discount rate of 6% for the first payment and 8% for the second payment, we get:

PV = 10,000/(1+0.06) + 15,000/[(1+0.06)(1+0.08)]

Simplifying the second term of the equation gives:

PV = 10,000/1.06 + 15,000/1.1468

Therefore, Choice C is the correct answer.

Your Uncle Wants to Help You with Your College Expenses