Question

What is the present value of $5,000 due in ten years assuming money grows according to compound interest and the annual effective rate of interest is 4% for the first three years, 5% for the next two years, and 5.5% for the final five years?

Answer 1

$ 3,085

Step-by-step explanation:

Given that;

The present value(PV) ------ ???

Future payment (F) ---- $5,000

The annual effective rate are 4%, 5% and 5.5% respectively, which can be illustrated as;

r = 0.04, 0.05 and 0.055 respectively.

The present value formula is given as:

`PV=(F)/((1+r)^n)`

`PV=(5000)/((1+0.04)^3(1+0.05)^2(1+0.055)^5)`

PV = 5000 × (1.04)⁻³(1.05)⁻²(1.055)⁻⁵

= $ 3,084.814759

≅ $ 3,085