Question

A business acquaintance promises to deliver a $20 bill to you one year from today. how much should you be willing to pay today for this promise?

Answer 1

To determine the present value of a future payment, you need to consider the time value of money and the potential return you could earn. Using the formula Present Value = Future Value / (1 + Interest Rate)^Number of years, you can calculate the present value as $19.05.

Step-by-step explanation:

To determine how much you should be willing to pay today for a promise to receive a $20 bill one year from today, you need to consider the concept of present value. Present value refers to the current value of a future payment, taking into account the time value of money and the potential return you could earn if you had that money now.

To calculate the present value of the $20 bill, you would need to discount it by the appropriate interest rate. Let's assume the interest rate is 5%.

Set up the formula: Present Value = Future Value / (1 + Interest Rate)Number of years

Plug in the values: Present Value = $20 / (1 + 0.05)1

Solve the equation: Present Value = $20 / (1.05)1 = $19.05

Therefore, you should be willing to pay approximately $19.05 today for the promise to receive a $20 bill one year from today.

Answer 2

You need to consider the nominal interest rate in your country. The $20 value is the future value of the money you will be given. Therefore, you need to consider the interest rate to get the present value which is the amount that you should be willing to pay today for this promise.