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