Question

Present value (with changing interest rates). Marty has been offered an injury settlement of $15,000 payable in 3 years. He wants to know what the present value of the injury settlement is if his opportunity cost is 3.5%. The opportunity cost is the interest rate in this problem. What if the opportunity cost is 7.5%? What if it is 10%? If Marty's opportunity cost is 3.5%, what is the present value of the injury settlement? (Round to the nearest cent.)

Answer 1

If opportunity cost is 3.50%:

Amount payable in 3 years = $15,000

Present Value = Amount payable / (1 + Interest rate)^Period
Present Value = $15,000 / 1.035^3
Present Value = $13,529.14

If opportunity cost is 7.50%:

Amount payable in 3 years = $15,000

Present Value = Amount payable / (1 + Interest rate)^Period
Present Value = $15,000 / 1.075^3
Present Value = $12,074.41

If opportunity cost is 10.00%:

Amount payable in 3 years = $15,000

Present Value = Amount payable / (1 + Interest rate)^Period
Present Value = $15,000 / 1.10^3
Present Value = $11,269.72