CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
Maria Lopez expects to receive a single payment of EUR 50,000 in 6 years. The appropriate discount rate is 5% per year compounded annually. The present value of the payment is closest to:
The present value is about EUR 37,311. Dividing EUR 50,000 by 1.05 raised to the sixth power, which is 1.3401, gives the amount that grows to EUR 50,000 in six years at 5% annual compounding.
- AEUR 37,311Correct
- BEUR 38,000
- CEUR 50,000
Explanation
PV = 50,000 / 1.05^6. 1.05^6 = 1.340096, so PV = 37,310.8, about EUR 37,311. EUR 38,000 does not follow from the formula and EUR 50,000 ignores discounting altogether.
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