Question

if you were guaranteed $12,000 in 1 year ehat id the difference in the pv if the discount rate is 4% vs 6%?

Answer 1

Here we will use the following formula:

PV = FV / (1 + r%)ⁿ

where, FV = Future value = $12000, PV = Present value, r = rate of interest, n= time period =1 year

At discount rate 4%:

putting these values in the above equation, we get,

PV = $12000 / (1 + 4%)¹

PV = $12000 / (1 + 0.04)

PV = $12000 / 1.04

PV = $11538.46

So, present value is $11538.46.

At discount rate 6%:

putting these values in the above equation, we get,

PV = $12000 / (1 + 6%)¹

PV = $12000 / (1 + 0.06)

PV = $12000 / 1.06

PV = $11320.75

So, present value is $11320.75.

Difference in present values at 4% and 6%:

Difference = $11538.46 - $11320.75 = $217.7