Question

You expect to receive a gift of 1000 three years from today. What is the value of this gift today if the discount rates are 6%, 6.5%, and 7% over the next three years?

Answer 1

The value of the gift today depends on the discount rate. For discount rates of 6%, 6.5%, and 7%, the present value of the gift is $839.62, $834.25, and $828.5 respectively.

Step-by-step explanation:

To calculate the present value of a future gift, we need to discount the future amount by the applicable discount rate for each year. In this case, we have three discount rates: 6%, 6.5%, and 7% over the next three years. Let's calculate the present value for each discount rate:

1. For a discount rate of 6%, the present value is calculated as: $1000 / (1+0.06)^3 = $839.62
2. For a discount rate of 6.5%, the present value is calculated as: $1000 / (1+0.065)^3 = $834.25
3. For a discount rate of 7%, the present value is calculated as: $1000 / (1+0.07)^3 = $828.5

Thus, the value of the gift today is $839.62 if the discount rate is 6%, $834.25 if the discount rate is 6.5%, and $828.5 if the discount rate is 7%.