Question

Derek has the opportunity to buy a money machine today. The money machine will pay Derek $43,245.00 exactly 5.00 years from today. Assuming that Derek believes the appropriate discount rate is 13.00%, how much is he willing to pay for this money machine?

Answer 1

Answer:

$23, 472

Explanation:

The question is to calculate how much Derek is willing to pay for the machine.

What the money Machine will pay in 5 years = $43, 245.00

The Discount rate= 13%

The number of years = 5 Years

Therefore, Present value of the machines:

PV= P x [1/(1+r)∧n]; P= Future benefit; r = rate and n = number of years

The calculation is as follows

PV= P x [1/(1+r)∧n

= $43,245 x 1/[(1+0.13)∧5]

=$43,245 x 1/1.84243

=$43,245 x 0.5428

=$23,472 (rounded)