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MOD 2 CaseFIN[1] - Present Value Present Value Byron E...

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Present Value 1 Present Value Byron E. Ferguson FIN 301 – Principles of Finance Module 2 Case Assignment Part I Dr. John Halstead July 22, 2010
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Present Value 2 Part I: Calculation of present value. A. Suppose your bank account will be worth $7,000.00 in one year. The interest rate (discount rate) that the bank pays is 8%. What is the present value of your bank account today? What would the present value of the account be if the discount rate is only 3%? $7000 = total value in 1 year $7000 = total value in 1 year (8% or 0.80 x 1year) = 0.80 (3% or 0.30 x 1year) = 0.30 1+ (0.80) = 1.80 1+ (0.30) = 1.30 $7000 / 1.80 = $6481.48 $7000 / 1.30 = $6796.12 PV= $6481.48 PV=$6796.12 B. Suppose you have two bank accounts, one called Account A and another Account B. Account A will be worth $4,000.00 in one year. Account B will be worth $9,600.00 in two years. Both accounts earn 5% interest. What is the present value of each of these accounts? $4000 = total value in 1 year $9600 = total value in 1 year (5% or 0.50 x 1year) = 0.50 (5% or 0.50 x 1year) = 0.50 1+ (0.50) = 1.50 1+ (0.50) = 1.50 $4000 / 1.50 = $3809.52 $9600 / 1.50 = $8707.48 PV= $3809.52 PV=$8707.48 C.
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