Question

Your friend offers to pay you $3,000 five years from now. You'd prefer the money now so you can put it in a bank account at 8% interest. How much less Should your friend pay you today in. order to be equivalent to her original offer ?

Answer 1

$958.25

Step-by-step explanation:

PV = FV(1 +r)^(-t) . . . . present value of an amount earning rate r compounded annually for t years

PV = $3000(1.08^-5) ≈ $2041.75

The equivalent present value is $2041.75.

__

This amount is less than the offered amount by ...

$3000 -2041.75 = $958.25

She should pay you $958.25 less in order to make the offers equivalent.