Calculate the present value of $25,000 to be received in 5 years, assuming an opportunity cost of 10%.
To calculate the present value of $25,000 to be received in 5 years, we can use the concept of present value and the formula for calculating present value.
The formula for calculating the present value is:
Present Value = Future Value / (1 + Interest Rate)^n
Where:
- Future Value is the amount of money to be received in the future
- Interest Rate is the opportunity cost or discount rate
- n is the number of periods or years
Using the given values:
Future Value = $25,000
Interest Rate = 10% or 0.1 (decimal form)
n = 5
Plugging in the values into the formula, we get:
Present Value = $25,000 / (1 + 0.1)^5
Now, we can solve this equation step by step.
1. Add 1 to the interest rate: 1 + 0.1 = 1.1
2. Raise this sum to the power of the number of years: 1.1^5 = 1.61051 (rounded to 5 decimal places)
3. Divide the Future Value by the result: $25,000 / 1.61051 = $15,487.37 (rounded to 2 decimal places)
Therefore, the present value of $25,000 to be received in 5 years, assuming an opportunity cost of 10%, is approximately $15,487.37.