Question

Compute the present value of a $2,000 deposit in year 1, and another $1,500 deposit at the end of year 3 if interest rates are 10 percent.

Answer 1

the present value formula that I will use is the following:

present value = future value / (1 + interest rate)ⁿ

in the first case, the present value of $2,000 in 1 year is:

PV = $2,000 / (1 + 10%) = $2,000 / 1.1 = $1,818.18

in the second case, the present value of $1,500 in 3 years is:

PV = $1,500 / (1 + 10%)³ = $1,500 / 1.331 = $1,126.97