An investment will pay you 20000 in 7 years The appropriate

An investment will pay you $20,000 in 7 years. The appropriate discount rate is 10 percent compounded daily. Required: What is the present value?

Solution

The Future value of the investement = FV = $20,000.

Considering 365 days in a year , the number of period the investment to be compounded = N = 7 years = (7 X 365) days= 2555 days [ As daily compounded]

Annually interest rate = i = 10%

So daily interest rate for compunding = (i/365) = (10%/ 365) = 0.027393%

The present value of the future investment = The presnt price I have to pay.

Let say the present price I have to pay = PV

PV will be compunded over 7 years or 2555 days with daily compounded interest rate of 0.027397% will give the investment value of $20000.

Therefore,

PV X (1+ 0.027397%)^(2555) = $20,000

Solving this equation, we get,

PV = $ 9932.658

Ans:- The present value of the investment is $ 9932.658.