Question

1. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

(a) What is the present value of $25,600 due 12 periods from now, discounted at 5%? (Round answer to 2 decimal places, e.g. 25.25.)

Present value $ =

(b) What is the present value of $25,600 to be received at the end of each of 10 periods, discounted at 11%? (Round answer to 2 decimal places, e.g. 25.25.)

Present value $ =  

2. Pharoah Company is considering an investment that will return a lump sum of $900,600, 6 years from now.

What amount should Pharoah Company pay for this investment to earn an 7% return? (Round answer to 2 decimal places, e.g. 25.25.)

Lincoln Comapny should pay $ =

3. Oriole Company is considering investing in an annuity contract that will return $32,460 annually at the end of each year for 12 years.

What amount should Oriole Company pay for this investment if it earns an 11% return? (Round answer to 2 decimal places, e.g. 25.25.)

Oriole Company should pay

$ =

Answer 1

Present Value is considering time value of money. Which means one rupee worth now will be less valued in future by inflation rate(here discount rates are given).

1a)

Discount factor can be obtained from present value table for 12period at 5% .Or may be calculated as below (W1)

Present Value =25,600 * Discount Factor

........................=25,600 * 0.55683(w1) =14,254.85

25,600 recieved after 12year period is worth 14,254.85 now..

W1)Discount Factor of Present value

DF=   where, n=number of period 7 r=discount Rate

==0.55683...

b) In this case each year we are receiving 25,600 for 10periods.

For such constant payouts per year:

1)May calculate PV of payment received each year and sum (for 10period it is ten times,is big job)

2)But we have another easy option to calculate Annuity, By looking Present Value Annuity Table for 11% for 10peroidor Calculate annuity Factor as(W2)

Present Value of Annuity = 25,600 * DF

.............................................=25,600 * 5.88923(W2) = 150,764.29

W2) Discount Factor Present Value of annuity

= (Only discountfactor part)

..................................................= 5.88923..

2) Here The future Value of sum received after 6Years is given 900,600. Now we want to find the investment needed for that return, this will be simply the present value @7% for 6Years.

PV = 900,600 * DF =900,600 * =900,600 * 0.66634 =600,105.80

Pharoah 600,105 invested now at a rate of 7% will be 900,600 after 6Years.

3) 32,460 will be received annually after investing a sum today. That can be find by Calculating Present Value of Annuity as in (1b)

Pay Now = 32,460 *

.................=32,460*

.................=32,460* 6.49235

.................=210,741.68

Making an investment of 210,741 now at 11% for 12years will return 32,460 per year