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11 December, 13:06

Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica. The package requires that you pay $20,000 today, $35,000 one year from today, and a final payment of $45,000 on the day you depart three years from today. What is the cost of this vacation in today's dollars if the discount rate is 9.75 percent?

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  1. 11 December, 13:14
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    Total cost of vacation = $89,250.37

    Explanation:

    Giving the following information:

    The package requires that you pay $20,000 today, $35,000 one year from today, and a final payment of $45,000 on the day you depart three years from today.

    To calculate the present value, we need to use the following formula:

    PV = FV / (1+i) ^n

    i = 0.0975

    Year0 = 20,000

    Year 1 = 35,000/1.0975 = 31,890.66

    Year 2 = 45,000/1.0975^2 = 37,359.71

    Total = $89,250.37
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