ASSIGNMENT

Assignment

Assignment

PART 1

Q: Suppose your bank account will be worth $15,000.00 in one year. The interest rate (discount rate) that the bank pays is 7% & 5%. PV is required.

Data:

Future Value (FV): $15,000.00

Discount Rate (r): 7% & 4%

Time Period (T): 1 Year

Present Value (PV): To Find

Formula

Present Value= Future Value / (1+ discounted Rate) ^time period

Solution

Present Value (PV) at 7%= 15,000 / (1+0.07) ^1

= PV= $14,019

Present Value (PV) at 4%= 15,000 / (1+0.04) ^1

= PV= $14,423

Q: Account A will be worth $6,500.00 in one year. Account B will be worth $12,600.00 in two years. Both accounts earn 6% interest. What is the present value of each of these accounts?

Calculations For Account A:

Given

Future Value (FV): $6,500

Discount Rate (r): 6%

Time Period (T): 1 Year

Present Value (PV): To Find

Formula

Present Value= Future Value / (1+ discounted Rate) ^time period

Solution

Present Value (PV) at 6%= 6,500 / (1+0.06) ^1

= Present Value (PV) at 6%= $ 6,132.0

Calculations For Account B:

Given

Future Value (FV): $12,600

Discount Rate (r): 6%

Time Period (T): 2 Year

Present Value (PV): To Find

Formula

Present Value= Future Value / (1+ discounted Rate) ^time period

Solution

Present Value (PV) at 6%= 12,600 / (1+0.06) ^2

= Present Value (PV) at 6%= $ 11,213

C. Suppose you just inherited an gold mine. Here is how much income this gold mine is projected to bring you each year for the next three years: Year 1: $49,000,000 Year 2: $61,000,000 Year 3: $85,000,000 Compute the present value of this stream of income at a discount rate of 7%, 5%, 3%

Given

Future Values: Year 1= $49,000,000

Year 2= $61,000,000

Year 3= $85,000,000

Time Period= 3 Years

Interest Rate= 7%, 5% & 3%

Present Value= To Find

Formula

Present Value= Future Value / (1+ discounted Rate) ^time period

Present Value At 7%

Present Value of Year 3

Present Value (PV) at 7%= 85,000,000/ (1+0.07) ^3

= 85,000,000/ 1.225043

= $69,385,319

Present Value of Year 2

Present Value (PV) at 7%= 61,000,000/ (1+0.07) ^2

= 61,000,000/ 1.1449

= $53,279,762

Present Value of Year 1

Present Value (PV) at 7%= 49,000,000/ (1+0.07) ^1

= 49,000,000/ 1.07

= $45,794,392

Net Present Value = PV1 + PV2 + PV3

= 69385319 + 53279762 + 45794392

Net Present Value= $168,459,473

Present Value At 5%

Present Value of Year 3

Present Value (PV) at 5%= 85,000,000/ (1+0.05) ^3

= 85,000,000/ 1.157625

= $73,426,196

Present Value of Year 2

Present Value (PV) at 5%= 61,000,000/ (1+0.05) ^2

= 61,000,000/ 1.215506

= $50,184,861

Present Value of Year 1

Present Value (PV) at 5%= 49,000,000/ (1+0.05) ^1

= 49,000,000/ 1.05

= $46,666,667

Net Present Value = PV1 + PV2 ...