Your local travel agent is advertising an extravagant global vacation.The package deal requires that you pay £5,000 today, £15,000 one year from today, and a ﬁnal payment of £25,000 on the day you leave two years from today.What is the cost of this vacation in today's pounds if the discount rate is 6%?

Question

Quizplus · Accepted Answer

We need to find the present value of the three cash flows:
PV = £5,000 + £15,000/(1+0.06)^1 + £25,000/(1+0.06)^2
PV = £5,000 + £14,150.94 + £22,249.91
PV = £41,400.85
Therefore, the cost of the vacation in today's pounds is £41,400.85. The best choice is B.

Your Local Travel Agent Is Advertising an Extravagant Global Vacation