Question

Derek has the opportunity to buy a money machine today. The money machine will pay Derek $32,772.00 exactly 18.00 years from today. Assuming that Derek believes the appropriate discount rate is 15.00%, how much is he willing to pay for this money machine?

Answer 1

The amount to be paid today for the machine is $2,648.15

Step-by-step explanation:

The present value can be defined as the value of money today for the future contracts. It is determined by using the discounting factor, and is affected by the number of years of the contract.

The present value is computed as follows:

`\begin{aligned}\text{Present Value}&=\frac{\text{Future Value}}{1+\text{Discount rate}}*\text{number of period}\\\\&=(\$32,772)/(1+0.15)*18\\\\&=\$2,648.15\end{aligned}`