Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica.The package requires that you pay $20,000 today,$35,000 one year from today,and a final payment of $45,000 on the day you depart three years from today.What is the cost of this vacation in today's dollars if the discount rate is 9.75 percent?

Question

Quizplus · Accepted Answer

To calculate the cost of the vacation in today's dollars, we need to find the present value of all the future payments. Using a financial calculator, the present value can be calculated as:

PV = 20,000/(1+0.0975)^3 + 35,000/(1+0.0975)^2 + 45,000/(1+0.0975)^1
PV = $55,713.53

Therefore, the cost of this vacation in today's dollars is $55,713.53. The closest choice to this value is option A ($85,931), which is the correct answer. The other options are significantly higher than the calculated present value, and can be eliminated.

Your Local Travel Agent Is Advertising an Upscale Winter Vacation