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10 November, 13:57

Pam is in need of cash right now and wants to sell the rights to a $1,000 cash flow that she will receive 5 years from today. If the discount rate for such a cash flow is 9.5%, then what is the fair price that someone should be willing to pay Pam today for rights to that future cash flow?

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  1. 10 November, 14:05
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    Fair price = $635.23

    Explanation:

    Th fair price that he should be willing to pay is the present value of the $1000 expected in 5 years time.

    Present value (PV) is the worth today if a future amount is discounted at a particular rate of interest.

    PV = FV * (1+r) ^ (-n)

    PV - present value = ?

    FV - Future value - 1000,

    r - discount rate - 9.5%,

    n - future date - 5

    PV = 1,000 * (1.0950^ (-5)

    PV = 1,000 * 0.6352

    PV = 635.2276653

    Fair price = $635.23
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