Suppose the interest rate [tex]i[/tex] is 2% per year. What is the present value of [tex]$1,100 to be received in six years?

A. $[/tex]898.18
B. [tex]$976.77
C. $[/tex]979.00
D. $1,075.35



Answer :

Sure, let's solve this step-by-step.

To determine the present value (PV) of a future amount of money, we use the formula:

[tex]\[ PV = \frac{FV}{(1 + i)^n} \][/tex]

where:
- [tex]\( FV \)[/tex] is the future value,
- [tex]\( i \)[/tex] is the annual interest rate, and
- [tex]\( n \)[/tex] is the number of years.

In this problem:
- The future value ([tex]\( FV \)[/tex]) is [tex]$1,100, - The annual interest rate (\( i \)) is 2%, which is 0.02 when expressed as a decimal, - The number of years (\( n \)) is 6. Now, let's apply the values to the formula: \[ PV = \frac{1100}{(1 + 0.02)^6} \] First, calculate the factor \( (1 + i)^n \): \[ (1 + 0.02)^6 = 1.02^6 \] Then calculate the present value: \[ PV = \frac{1100}{1.02^6} \] After performing the calculation, the present value (`PV`) is approximately $[/tex]976.77.

Therefore, the present value of [tex]$1,100 to be received in six years at an annual interest rate of 2% is: \[ \boxed{976.77} \] The correct answer from the provided options is $[/tex]976.77.