Question

Derek has the opportunity to buy a money machine today. The money machine will pay Derek $13,751.00 exactly 12.00 years from today. Assuming that Derek believes the appropriate discount rate is 4.00%, how much is he willing to pay for this money machine?

Answer 1

$8,588.83

Step-by-step explanation:

To determine the amount that Derek would pay for the money machine, we are to calculate the present value of the lump sum to be received in 12 years.

Present value is the sum of discounted cash flows.

Present value can be calculated using a financial calculator

Cash flow each year from year 1 to 11 = 0

Cash flow in year 12 = $13,751.00

I = 4%

Present value = $8,588.83

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute