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19 June, 19:15

Suppose you the alternative of receiving either $22,000 at the end of five years or P dollars today. Currently, you have no need for money, so you could deposit the P dollars in a bank that pays 5% interest. What value of P would make you indifferent in your choice between P dollars todays and the promise of $22000 at the end of five years?

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  1. 19 June, 19:25
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    Indifference amount = $17,237.58

    Explanation:

    Giving the following information:

    Suppose you the alternative of receiving either $22,000 at the end of five years or P dollars today.

    We need to find the present value of $22,000 at an interest rate of 5%.

    PV = FV / (1+i) ^n

    PV = 22,000 / 1.05^5 = $17,237.58
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