Suppose an investor has the opportunity to make an investment that promises to pay her $100,000 five years from now. How much should this investor be willing to pay today for this investment opportunity if she could otherwise invest her money in an interest-bearing account that yields 5% (annual) and compounds interest on a monthly basis?

The amount to be invested is $78,352.62

Explanation:

PV=FV/(1+r)^n

PV is present value and unknown

FV  is the future value of $100000

rate of return , r is 5%

n is the number of years given as 5

PV=100000/(1+0.05)^5

PV=$78352.62

The investor would have invest today $78352.62 in order to have in 5 years the sum of $100000 at compound interest of 5% per year.

The pv can also be computed using excel with formula pv(rate,nper,,-fv) as it is found in the attached spreadsheet.

It is better to know the two methods so that one can confirm answer from one method with the other method

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