What is the present value of $10,000 discounted at a rate of 5% per year if received at the end of 5 years?

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To calculate the present value (PV) of an amount of money that you will receive in the future, we use the formula:

PV = FV / (1 + r)^n

Where:

  • PV = Present Value
  • FV = Future Value ($10,000 in this case)
  • r = discount rate (5% or 0.05)
  • n = number of years until payment (5 years)

Now, substituting the values into the formula:

PV = 10000 / (1 + 0.05)^5

This simplifies to:

PV = 10000 / (1.276281563)

Calculating the denominator:

PV = 10000 / 1.276281563 ≈ 7835.24

Therefore, the present value of $10,000 discounted at 5% per year, to be received at the end of 5 years, is approximately $7,835.24.

This means that receiving $10,000 in 5 years is equivalent to having about $7,835.24 today, considering the 5% discount rate. Understanding this concept is crucial for making informed financial decisions.

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