Your boss leaves you a note, asking you to determine the present value of a $125,000 payment to be made in four years assuming a discount rate of 16%. However, you misread her handwriting, and mistakenly thought the discount rate you were supposed to use was 6%. What is the dollar value of the mistake in your answer because you used the wrong discount rate?
Answer: $198023.42 Explanation:
PV=FVx[1÷(1×i)^ PV= present value
FV=$25000
I=6% =0.06
^=4years PV=$250,000×[1÷(1-0.06)^4
PV=$250,000×[1÷(1.06)^4
PV=$250,000×[1÷1.26247696]
PV=$250000×[0.7920936632]
PV=198,023.42 The dollar value of the mistake is $198,023.42
