Final answer:
The present value of a $25,000 donation promised five years from today, valued one year from now at an 8 percent interest rate, is calculated using the present value formula, PV = $25,000 / (1 + 0.08)^4.
Step-by-step explanation:
To determine what a $25,000 donation promised five years from today is worth next year, we apply the concept of present value. The formula for present value (PV) takes into account the future value of money (in this case, $25,000), the interest rate, and the number of periods until the money is received.
Given an interest rate of 8 percent, and the fact that we are looking to find the value one year from now, the formula you would use is:
This is because the money is promised five years from today, but we want to find out its value one year before it is received, which is four years from today. Therefore, you should divide the future value by the compound factor which is (1 + interest rate) raised to the power of four, not five, because one year has already elapsed.