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Chapter 4: Q9BP (page 282)

You are going to receive $205,000 in 18 years. What is the difference in present value between using a discount rate of 12 percent versus 9 percent?

Short Answer

Expert verified

The difference in present value is $16,800.60.

Step by step solution

01

Identification of the required information

Future value (FV) = $205,000

Period (n) = 18 year

02

Present value (PV) at Interest Rate (i) = 12%

PV=FV脳1+i-n=$205,000脳1+12%-18=$26,658.12

03

Present value (PV) at Interest Rate (i) = 9%

PV=FV脳1+i-n=$205,000脳1+9%-18=$43,458.72

04

Difference in present value

Difference in PV=PV at 9% - PV at 12%=$43,458.72-$26,658.12=$16,800.60

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