You have acknowledged that you will receive $10,550 in one year. That's good news, but it would be better to get that money now rather than get it in one year. The yearly interest rate is now equal to 5.5%.
You know from your finance courses at the college that the future value of cash can be discounted to present value. (You know you can use the yearly interest rate for the discount rate.) Here is how it is done:
We have seen that the present value of one year later's $10,550 is $10,000, while the yearly interest rate is 5.5%.
Now it is the fun part, just insert the values into the formula:
Now let's think you have to wait two years rather than wait one year. So, what happens if the value of N increases?
We have seen that the present value of two years later's, $10,550, is $9,478.67, while the yearly interest rate is 5.5%.
Hope it is helpfull.
I will see you in another post.
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