A bank lends some money to a business. The business will pay the bank a single payment of $180 000 in 10 years' time. How much greater is the present value (PV)of this payment if the interest rate is 9% rather than 8%?

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Quizplus · Accepted Answer

The present value (PV) of a future payment is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of periods. For an 8% interest rate, PV = $180,000 / (1 + 0.08)^10 = $83,333. For a 9% interest rate, PV = $180,000 / (1 + 0.09)^10 = $75,992. The difference in present values is $83,333 - $75,992 = $7,341.

A Bank Lends Some Money to a Business