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Your friend offers to pay you $3,000 five years from now. You'd prefer the money now so you can put it in a bank account at 8% interest. How much less Should your friend pay you today in. order to be equivalent to her original offer ?

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sqdancefan

Answer:

  $958.25

Explanation:

  PV = FV(1 +r)^(-t) . . . . present value of an amount earning rate r compounded annually for t years

  PV = $3000(1.08^-5) ≈ $2041.75

The equivalent present value is $2041.75.

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This amount is less than the offered amount by ...

  $3000 -2041.75 = $958.25

She should pay you $958.25 less in order to make the offers equivalent.

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