# Sad Solution Essay

511 Words3 Pages
1. Finding Present Values: What is the present value of the following future payments: a) \$1,210 in 2 years at a 10% discount rate: present value = \$1,210/(1.10)2 = \$1000 b) \$1,259.71 in 3 years at an 8% discount rate: present value = \$1,259.71/(1.08)3 = \$1000 c) \$1,040 in 1 year at a 4% discount rate: present value = \$1,040/(1.04)1 = \$1000 2. General formula for finding the present value of several future annual payments Present Value = P1/(1+r)1 + P2/(1+r)2 + ( +(F + Pn)/(1+r)n Where 1, 2, (n = number of years; r = discount rate; Pn = payment; F = face value 3. Finding Present Values Using the General Formula: a) You can make two different investments. The interest you receive on the first investment is \$110 per year for three years. You receive \$330 on the second investment in the third year and nothing in the first two years. If your discount rate is 6%, what should you pay for each of these investments? Present Value of #1 = \$110 + \$110 + \$110 = \$294.03 (1.06) (1.06)2 (1.06)3 Present Value of #2 = \$0 + \$0 + \$330 = \$ 277.07 (1.06) (1.06)2 (1.06)3 You will pay more for investment #1 b) You can make two different new products at your plant. Product #1 is expected to earn no profit in the first year, \$500 in the second year and \$1,000 in the third year. Product #2 is expected to earn \$500 per year for three years. Assume your cost of capital is 10%. Which product should you make? Present Value of #1 = \$0 +