Question

A friend of yours has won a prize of $10,000 to be
paid exactly after 2 years. On the same day, he was
offered $8,000 as a consideration for his agreement
to sell the right to receive the prize. The market
interest rate is 12% and the interest is compounded
annually. Help him by determining whether the offer
should be accepted or not.

Answer 1

AccountingExplained

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Present Value of a Single Sum of Money

Present value of a future single sum of money is the value that is obtained when the future value is discounted at a specific given rate of interest. In the other words present value of a single sum of money is the amount that, if invested on a given date at a specific rate of interest, will equate the sum of the amount invested and the compound interest earned on its investment with the face value of the future single sum of money.

Formula

The formula to calculate present value of a future single sum of money is:

Present Value (PV) = Future Value (FV)(1 + i)n

Where,
   i is the interest rate per compounding period; and
   n are the number of compounding periods.

Answer 2

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