You expect to receive a payment of $6500 one year from now

Economics Nov 22, 2020

You expect to receive a payment of $6500 one year from now. Answer the following questions and show your calculations:
A. The discount rate is 5%. What is the present value of the payment to be received?
B Suppose that the discount rate rises to 7%. What is the present value of the payment to be received?
C. What will cause the present value of a future payment to decline?

Expert Solution

Computation of Present Value:

PV = FV/(1+r)^n

Here,

FV = Future Value

r = discount rate

n = time period

a) When Discount Rate is 5%:

PV = $6,500/(1+0.05)^1 = $6,500/1.05 = $6,190.48

b) When Discount Rate is 7%:

PV = $6,500/(1+0.07)^1 = $6,500/1.07 = $6,074.77

c) The present value of a future payment will decline with a rise in the discount factor.

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