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Present value exercise

# Present value exercise - ACCT 410 Present value calculation...

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Unformatted text preview: ACCT 410 Present value calculation exercise Example 1: Calculate present value of a lump sum payment Definition: Lump sum payment one amount to be exchanged sometime in the future LittleSTAR Company wants to borrow money from you. The company promises to pay you back \$1,000k three years from now. The current market rate is 10% (compound annually). How much would you be willing to lend to LittleSTAR Company today? (Hint: Calculate the present value of 1,000k lump sum payment at the end of period three, using 10% market rate. Use Present Value Table 2 to find the present value factor.) Example 2: Calculate present value of an annuity Definition: Annuity a stream of equal payment made a regular interval to be exchanged over a period of time LittleMOON Company wants to borrow money from you. The company promises to pay you \$10k each year for four years. The current market rate is 8% (compound annually). How much would you be willing to lend to LittleMOON Company today? (Hint: Calculate the present value of annuity of 10k over four periods at 8%. Use Present Value Table 4 to find the present value factor.) Solutions: Example 1: PV=1000k*[1/(1+10%)^3] =1000k*0.75132=751.32k Example 2: PV=10k*[1/(1+8%)^1+1/(1+8%)^2+1/(1+8%)^3+1/(1+8%)^4] =10k*3.31213k=33.1213k ...
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