Question

Compounding and Discount Factor (Natural Resource Extraction)

1. Explain present value of benefit and future value cost.

2. Assume you put 20,000 dollars (principal) in a bank for the interest rate of 4%. How much money will bank give you after 10 years?

3. Assuming the discount rate of 10%, present value of 100 dollars which will be received in 5 years. Calculate that value will be recerived.

4. Suppose the timber deposits have a value with RM20000 today and have an alternative rate of return with 10% for 20 years. How much would the market value have in the future?

5. Let say the timber deposited is planner to be extracted in 40 years and estimated total future market value is RM 15,550. Calculate the present value of the mineral with the discounting factor is 10%.

Answer 1

1.

Present value of benefits is the discounted value of future stream of benefits or of a single benefit amount that will be received at some future point in time. Future value of cost is the value of cost at a future point in time that has been incurred in the past or is being incurred at the present time.

 

2.

FV = PV*(1+r)^n

Hence FV = 20,000*1.04^10

= 29,604.89

 

3.

Here also use the formula: FV = PV*(1+r)^n

= 100*1.10^5

= 161.05

 

4.

FV = PV*(1+r)^n

= 20,000*1.10^20

= 134,550

 

5.

FV = PV*(1+r)^n

Hence 15,550 = PV*1.10^40

Or 15,550 = PV * 45.25926

Or PV = 15550/45.25926

           = 343.58

2. FV is 29,604.89

3. Here also use the formula: FV = PV*(1+r)^n

= 100*1.10^5

= 161.05