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 +

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