Question

6 Slanell Suppose you have the choice of receiving either 55,235 SAR at the end of 5 years or P SAR today. You don't need money right now, so you would invest the P SAR in a bank that pays 5% interest. What value of PSAR would make you indifferent to your 7choice

Answer 1

The objective is to find the present worth amount (P) of a single future sum (F) which will be received after n periods at an interest rate of i compounded at the end of every interest period.

P = F/(1 + i)ⁿ

P = F(P/F, i, n)

(P/F, i, n) = Single payment present worth factor

F = Future amount at the end of year n

P = Principal amount

n = Number of interest periods

i = Interest rate

F = 55,235

n = 5

i = 5% or 0.05

P = 55,235/(1 + 0.05)⁵

P = 55,235(P/F, 5%, 5)

P = 55,235/(1.05)⁵

P = 55,235 × 0.784

P = 43,278

So, an amount of 43,278 SAR will make an individual indifferent.