you owe $30,000 payable at the end of five years, what amount should your creditor accept in payment immediately if he could earn 11% on the money?
To find the amount your creditor should accept in payment immediately, we need to calculate the present value of the $30,000 payable at the end of five years at an interest rate of 11%. The present value represents the current worth of the future payment.
To calculate the present value, we can use the formula for present value of a future amount:
Present Value = Future Value / (1 + Interest Rate)^Number of Periods
In this case:
Future Value = $30,000
Interest Rate = 11% (or 0.11 as a decimal)
Number of Periods = 5 years
Now we can substitute the values into the formula and calculate the present value:
Present Value = $30,000 / (1 + 0.11)^5
Calculating the base amount:
(1 + 0.11) = 1.11
(1.11)^5 = 1.6289 (rounding to four decimal places)
Finally, we can calculate the present value:
Present Value ≈ $30,000 / 1.6289
Using a calculator:
Present Value ≈ $18,419.33
Therefore, in order for your creditor to accept immediate payment, they should accept approximately $18,419.33.