You are given a choice between receiving 100 now or 200 in 8

You are given a choice between receiving $100 now or $200 in 8 years. What would the discount rate have to be for you to be indifferent between the two options?

Solution

Let the discount rate be x%

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

100=200/1.0x^8

1.0x^8=(200/100)

1.0x=(200/100)^(1/8)

x=(1.0905-1)*100

=9.05%(Approx).