Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica. The package requires that you pay $20,000 today, $35,000 one year from today, and a final payment of $45,000 on the day you depart three years from today. What is the cost of this vacation in today's dollars if the discount rate is 9.75 percent?

Total cost of vacation = $89,250.37

Explanation:

Giving the following information:

The package requires that you pay $20,000 today, $35,000 one year from today, and a final payment of $45,000 on the day you depart three years from today.

To calculate the present value, we need to use the following formula:

PV = FV / (1+i) ^n

i = 0.0975

Year0 = 20,000

Year 1 = 35,000/1.0975 = 31,890.66

Year 2 = 45,000/1.0975^2 = 37,359.71

Total = $89,250.37