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Homework answers / question archive / You've been promised a payment of $400 in the future
You've been promised a payment of $400 in the future. In which case is the present value of this payment highest? a you wait 3 years and the interest rate is 6% b. you wait 3 years and the interest rate is 5% c. you wait 2 years and the interest rate is 6% d. you wait 2 years and the interest rate is 5%
Answer
d .
Explanation
Computation of Present Value using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
a) Here,
PV = Present Value = ?
Rate = 6%
Nper = 3 years
PMT = 0
FV = $400
Substituting the values in formula:
=-pv(6%,3,0,400)
PV or Present Value = $335.85
b) Here,
PV = Present Value = ?
Rate = 5%
Nper = 3 years
PMT = 0
FV = $400
Substituting the values in formula:
=-pv(5%,3,0,400)
PV or Present Value = $345.54
c) Here,
PV = Present Value = ?
Rate = 6%
Nper = 2 years
PMT = 0
FV = $400
Substituting the values in formula:
=-pv(6%,2,0,400)
PV or Present Value = $356
d) Here,
PV = Present Value = ?
Rate = 5%
Nper = 2 years
PMT = 0
FV = $400
Substituting the values in formula:
=-pv(5%,3,0,400)
PV or Present Value = $362.81
So, the correct option is D "You wait 2 years and the interest rate is 5%".
