Asked by Yania Isabel Romero on Jun 18, 2024
Verified
Assume the current interest rate is 20%. The present value of $500 in one year would be
A) $180.
B) $417.
C) $750.
D) $1,083.
Interest Rate
The percentage rate at which interest is charged on a loan to the borrower, often expressed as an annual figure relative to the outstanding loan sum.
Present Value
The modern-day worth of a forthcoming sum of money or flow of cash payments, using a set rate of return for calculation.
Received
The action of being given or awarded something.
- Acquire the skill to compute the present value of a single future cash flow.
- Evaluate the effect of interest rate fluctuations on the current value of future cash flows.
Verified Answer
CF
corry frimpongJun 24, 2024
Final Answer :
B
Explanation :
The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($500), r is the interest rate (20% or 0.20), and n is the number of periods (1 year). Plugging in the values gives PV = $500 / (1 + 0.20)^1 = $500 / 1.20 = $416.67, which rounds to $417.
Learning Objectives
- Acquire the skill to compute the present value of a single future cash flow.
- Evaluate the effect of interest rate fluctuations on the current value of future cash flows.