Suppose you have the alternative of receiving either 22000 a

Suppose you have the alternative of receiving either $22,000 at the end of five years or P dollars today. You do not need the money, so you could deposit the P dollars in a bank that pays 5% interest. What value of P would make you indifferent in your choice between P dollars today and the promise of $22,000 at the end of five years?

Solution

Future worth = $22,000 Term 5 years Interest rate 5%

PV = FV*(1 / (1.05)⁵

PV = 22000*(1/1.05⁵

PV – 22000*0.783

PV = $17,226.

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