1. Tommy John is going to receive $1,000,000 in three years. The current market rate of interest is 10%.
a. Using the present value of $1 table in Exhibit 8, determine the present value of this amount compounded annually. Round to the nearest whole dollar.
b. Why is the present value less than the $1,000,000 to be received in the future? The present value is less due to
· inflation
· the compounding of interest
· deflation
over the 3 years.
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2. Determine the present value of $200,000 to be received at the end of each of four years, using an interest rate of 7%, compounded annually, as follows:
a.By successive computations, using the present value table in Exhibit 8. Round to the nearest whole dollar.
| First year | $ |
| Second Year | $ |
| Third Year | $ |
| Fourth Year | $ |
| Total present value | $ |
b. By using the present value table in Exhibit 10. Round to the nearest whole dollar. $ ___________
c. Why is the present value of the four $200,000 cash receipts less than the $800,000 to be received in the future? The present value is less due to
· inflation
· the compounding of interest
· deflation
over the 4 years.
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3. On January 1, 2016, you win $50,000,000 in the state lottery. The $50,000,000 prize will be paid in equal installments of $6,250,000 over eight years. The payments will be made on December 31 of each year, beginning on December 31, 2016. If the current interest rate is 5%, determine the present value of your winnings. Use Table 2. Round to the nearest whole dollar. $
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4. On January 1, 2016, you win $50,000,000 in the state lottery. The $50,000,000 prize will be paid in equal installments of $6,250,000 over eight years. The payments will be made on December 31 of each year, beginning on December 31, 2016. If the current interest rate is 5%, determine the present value of your winnings. Use Table 2. Round to the nearest whole dollar. $
Will the present value of your winnings using an interest rate of 12% be more than the present value of your winnings using an interest rate of 5%?
· Yes
· No
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5. Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder Co. issued $25,000,000 of five-year, 7% bonds, with interest payable semiannually, at a market (effective) interest rate of 9%.
Determine the present value of the bonds payable, using the present value tables in Exhibit 8 and Exhibit 10. Round to the nearest dollar. $
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