Question

Donald invests the $10,000 today. Donald’s interest rate is 10% and interest is compounded and paid at the end of each year. At the end of two years, Donald’s investment is worth $12,100. What is the present value of Donald’s investment?

Answer 1

The present value of Donald’s investment is $10,000.

Step-by-step explanation:

The present value (PV) can be described as the current value of a future amount of money or an expected stream of income given a specified rate of return. The future amount of money or an expected stream of incomes are discounted at the discount rate or the rate of return. This is why the present value is also know as the present discounted value.

The present value can be calculated using the following formula:

PV = FV / (1 + r)^n ............................................ (1)

Where, based on the information in this question, we have:

FV = Future value = $12,100

r = rate of return = 10%, or 0.10

n = Number of years = 2 years

Substituting the values above into equation (1), we have:

PV = $12,100 / (1 + 0.10)^2

PV = $12,100 / 1.21

PV = $10,000

Therefore, the present value of Donald’s investment is $10,000 which is equal to the original amount of $10,000 invested at the present day.