Question

Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today?

Answer 1

Answer:

$23,088.62

Explanation:

We must determine the present value of Liam's investment discounted by his opportunity cost rate. The present value formula is:

PV = FV / (1 + r)ⁿ

• FV = $52,000
• r = 7%
• n = 12

PV = $52,000 / (1 + 7%)¹² = $52,000 / 2.2522

PV = $23,088.62