Suppose an investor has the opportunity to make an investment that promises to pay her $100,000 5 years from now. How much should this investor be willing to pay today for this investment opportunity if he could otherwise invest his money in an interest bearing account that yields 5% (annual) and compounds interest on a monthly basis?
A) $77,920.54
B) $78,352.62
C) $97,942.46
D) $432,947.67

Question

Quizplus · Accepted Answer

To find out how much the investor should be willing to pay today, we need to calculate the present value of the $100,000 to be received in 5 years. The formula for the present value (PV) is PV = FV / (1 + r/n)^(nt), where FV is the future value ($100,000), r is the annual interest rate (5% or 0.05), n is the number of times the interest is compounded per year (12, since it's monthly), and t is the time in years (5). Plugging in the numbers: PV = $100,000 / (1 + 0.05/12)^(12*5) = $77,920.54.

Suppose an Investor Has the Opportunity to Make an Investment