How much more would you be willing to pay today for an investment offering $10,000 in 4 years rather than the normally advertised 5-year period? Your discount rate is 8%.
A) $544.47
B) $681.48
C) $740.74
D) $800.00

Question

Quizplus · Accepted Answer

To find out how much more we would be willing to pay for an investment offering $10,000 in 4 years, we need to calculate the present value of $10,000 received in 4 years, and compare it to the present value of $10,000 received in 5 years.

PV of $10,000 received in 4 years:
PV = FV / (1 + r) ^ n
PV = $10,000 / (1 + 0.08) ^ 4
PV = $7,455.53

PV of $10,000 received in 5 years:
PV = FV / (1 + r) ^ n
PV = $10,000 / (1 + 0.08) ^ 5
PV = $6,911.06

The difference between the two values is:
$7,455.53 - $6,911.06 = $544.47

Therefore, we would be willing to pay $544.47 more today for an investment offering $10,000 in 4 years rather than the normally advertised 5-year period.

How Much More Would You Be Willing to Pay Today