Question

How much would you pay today to receive $50 in one year and $60 in the second year if you can earn 15 percent interest on alternative investments of similar risk? $88.85?

Answer 1

The present value of an income of $60 in 2 years and $50 in 1 year at an interest rate of 15% can be computed as ...

... ($60/1.15 +$50)/1.15 = $88.85

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The present value (PV) of an amount (A) received 1 year from now earning annual interest rate r is ...

... PV = A/(1 +r)

For a sequence of non-uniform payments, we can work backward through the years as we did above.