How would we compute the present discounted value of payments of $8,000 received three years in the future and $10,000 received four years in the future? The interest rate is expected to be 5 percent for the next four years.

Question

Quizplus · Accepted Answer

The correct formula for calculating the present discounted value of future payments involves dividing the future payment by (1 + interest rate) raised to the power of the number of years until the payment is received. In this case, for $8,000 received in three years, the calculation is 8,000/(1.05)^3, and for $10,000 received in four years, it is 10,000/(1.05)^4. Option A correctly represents this calculation, despite the typographical errors in the option text.

How Would We Compute the Present Discounted Value of Payments