Question

You agree to receive $5000 now plus $5000 in one year to complete a job. You can earn 4.51% on your money.

a) The customer suggests a single fair amount be paid now instead, what do you consider to be fair? $____________

b) The customer suggests a single fair amount be paid 1 year from now instead, what do you consider to be fair? $____________

Answer 1

Amount to be recieved now = $5,000

Amount to be recieved after one year = $5,000

Interest rate = 4.51% or 0.0451

(a)

Calculate a single fair amount to be paid now -

Single fair amount = Amount to be recieved now + Present value of amount to be recieved after one year

Single fair amount = $5,000 + [$5,000/(1+0.0451)¹]

Sinlge fair amount = $5,000 + [$5,000/1.0451] = $5,000 + $4,784.23 = $9,784.23

The single fair amount to be paid now is $9,784.23

(b)

Calculate a single fair amount to be paid 1 year from now -

Single fair amount = Future value of amount to be recieved now + Amount to be recieved 1 year from now

Single fair amount = [$5,000 (1+0.0451)¹] + $5,000 = ($5,000 * 1.0451) + $5,000 = $5,225.5 + $5,000 = $10,225.5

The single fair amount to be paid 1 year from now is $10,225.5