Chapter 24, Problem 5MCQ

To determine

The correct option that determines the PV of the future value of $100 received after 2 years at a 10% rate.

Answer to Problem 5MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b.

Given Information:

FV is $100

Number of years is 2

Interest rate is 10%

By using the following formula, PV is determined as follows:

  $\begin{array}{c}\text{PV}=\text{FV}\left(\frac{1}{{\left(1+r\right)}^n}\right)\\ =\$100\left(\frac{1}{{\left(1.10\right)}^2}\right)\\ =\$100\left(0.82645\right)\\ =\$82.65\end{array}$

It is approx. $83. Therefore, option b is correct.

Explanation for incorrect options:

Since the question is calculations-based, options a, c, d, and e are incorrect.

Economics Concept Introduction

Interest rates: The rates that were charged by the investor who is ready to lend his/her money for a certain period of time to the borrower.

Present value of money: This is the concept that is used by every investor or financial dealer where the value of the dollar received today is compared with the value of the dollar that is expected to be received later by using interest rates.