Question

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 ___ over the 4 years.

Answer 1

Solution:

Computation of Present value
Year	Amount	PV factor	Present value
1	$200,000	0.93458	$186,916
2	$200,000	0.87344	$174,688
3	$200,000	0.81630	$163,260
4	$200,000	0.76290	$152,579
Total			$677,442

The present value is less due to interest over the 4 years.