aWhat single investment made today earning 13 annual interes

a.??What single investment made? today, earning 13?% annual? interest, will be worth ?$4900 at the end of 12 ?years? b. What is the present value of ?$4900 to be received at the end of 12 years if the discount rate is 13?%? c.??What is the most you would pay today for a promise to repay you ?$4900 at the end of 12 years if your opportunity cost is 13?%? d. ?Compare, contrast, and discuss your findings in part a through c.

Solution

In all three options we have same values with different terminologies. Rate of interest can be called as opportunity cost, annual interest rate of earning and discount rate hence, we have to find same thing for all three options.

Present value = Future value / (1+Rate)^Years

Present value = $4900 / (1+13%)^12

Present value = $1,130.46

.

a) Single investment required today $1,130.46

b) Present Value $1,130.46

c) Would pay $1,130.46 at most.

All three options will generate same present values