My friend lost a bet with me and now owes me money. However, he is broke...

My friend lost a bet with me and now owes me money. However, he is broke and will pay me in increments. $500 in two years, $400 in 4 years, and finally, $1000 in ten years, with an interest rate 3.2%. How much money did he bet today (present value)?

If you could, please show the formula and how you got the answer. The answer we are given is $1,551.92 and I'm confused on how to get there. Thanks!

Solutions

Expert Solution

Present value = (CF2 / (1+r)^2) + (CF4 / (1+r)^4) + (CF10 / (1 + r)^10)

= ($500 / (1+3.2%)^2) + ($400 / (1+3.2%)^4) + ($1000 / (1+3.2%)^10)

= $469.4730 + $352.6478 + $$729.7986

= $1,551.92

Present value = $1,551.92

jeff jeffy answered 2 years ago

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