Suppose someone offered to give you $1,000,000 five years in the future and the anticipated interest rate is 5 percent. The present value of this offer would be worth approximately

Question

Quizplus · Accepted Answer

To find the present value of future cash flows, we use the formula PV = FV / (1 + r)t, where PV is the present value, FV is the future value, r is the interest rate, and t is the number of years.

In this case, FV = $1,000,000, r = 0.05, and t = 5. Plugging these values into the formula, we get:

PV = $1,000,000 / (1 + 0.05)5
PV = $1,000,000 / 1.2763
PV = $784,005.81 ≈ $784,000

Therefore, the present value of the offer would be approximately $784,000.

Suppose Someone Offered to Give You $1,000,000 Five Years in the Future