On 12-31-19, Acme entered into an agreement that required Acme to pay someone $500,000 on 12-31-31....

On 12-31-19, Acme entered into an agreement that required Acme to pay someone $500,000 on 12-31-31. Assume the appropriate market rate of interest for Acme was 8%.
• As of 12-31-19, what was the present value of Acme’s obligation?

• As of 12-31-24, what was the present value of Acme’s obligation?

• As of 12-31-30, what was the present value of Acme’s obligation?

Expert Solution

a)	As of 12-31-19, the present value of Acme’s obligation		$ 1,98,556.88

Working;

	P	=	A	*	(1+i)^-n	Where,
		=	$ 5,00,000	*	(1+0.08)^-12	A	=	Future value of cash flow	=	$ 5,00,000
		=	$ 5,00,000	*	0.397114	i	=	Interest rate	=	8%
		=	$ 1,98,556.88			n	=	Time	=	12

b)	As of 12-31-24, the present value of Acme’s obligation		$ 2,91,745.20

Working;

	P	=	A	*	(1+i)^-n	Where,
		=	$ 5,00,000	*	(1+0.08)^-7	A	=	Future value of cash flow	=	$ 5,00,000
		=	$ 5,00,000	*	0.58349	i	=	Interest rate	=	8%
		=	$ 2,91,745.20			n	=	Time	=	7

c)	As of 12-31-24, the present value of Acme’s obligation		$ 4,62,962.96

Working;

	P	=	A	*	(1+i)^-n	Where,
		=	$ 5,00,000	*	(1+0.08)^-1	A	=	Future value of cash flow	=	$ 5,00,000
		=	$ 5,00,000	*	0.925926	i	=	Interest rate	=	8%
		=	$ 4,62,962.96			n	=	Time	=	1

ekkarill92 answered 1 year ago

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