Multiple Choice
What is the rate of return (expressed as a percentage) if you pay \$950 for a perpetuity that pays \$85 per year?
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10. Time Value of Money
Time Value of Money Equations
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
What is the present value of a \$500 payment to be received in one year if the discount rate is 5\% per annum?
A
\$495.00
B
\$475.00
C
\$525.00
D
\$476.19
Verified step by step guidance1
Step 1: Understand the concept of present value (PV). Present value is the current worth of a future sum of money given a specific discount rate. The formula for calculating PV is: PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods.
Step 2: Identify the given values in the problem. Here, the future value (FV) is $500, the discount rate (r) is 5% or 0.05, and the number of periods (n) is 1 year.
Step 3: Substitute the given values into the present value formula. Using MathML, the formula becomes: . Replace FV with 500, r with 0.05, and n with 1.
Step 4: Simplify the denominator. Calculate (1 + r)^n, which is (1 + 0.05)^1 = 1.05.
Step 5: Divide the future value by the calculated denominator. Perform the operation 500 / 1.05 to find the present value.
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