Question

Saved Help Save & Exit Submit Problem 4-13 Present Value with Different Discount Rates (LG4-4) Compute the present value of $1,200 paid in three years using the following discount rates: 5 percent in the first year, 6 percent in the second year, and 7 percent in the third year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value

Answer 1

Present Value

We’ve Future Value = $1,200

Interest Rate in Year 1 (r1) = 5%

Interest Rate in Year 2 (r2) = 6%

Interest Rate in Year 3 (r3) = 7%

Therefore, the Present Value = Future Value / (1 + r1)(1 + r2)(1 + r3)

= $1,200 / [(1 + 0.05) x (1 + 0.06) x (1 + 0.07)]

= $1,200 / 1.19091

= $1,007.63

“Hence, the Present Value = $1,007.63”