Full question:
The monthly average cable TV bill in 2017 is $80.58. If cable costs are climbing at an annual rate of 6% per year, how much will the typical cable subscriber pay in 2021? Assume annual compounding.
Answer and Explanation:
The present value of the TV bill is the money worth of the future TV bill today. Present value calculation shows that the value today is more than the value in the future(time value of money)
We calculate cost of the cable subscription in the future using future value as follows :
Since there is annual compounding
Future value formula= PV(1+r)^n
Given :
Present value PV= $80.58
r=6%
n=2021-2017=4 years
Substitute in formula FV = PV(1+r)^n
Future value=$80.58(1+0.06)^4
=$80.58(1+0.06)^4
=$80.58*1.2624
=$101.73