Question

Assume that you are going to receive $50,000 in 10 years. The current market rate of interest is 4%.

a. Using the present value of $1 table in Exhibit 5, determine the present value of this amount compounded annually. Round to the nearest whole dollar.

b.Why is the present value less than the $50,000 to be received in the future?

Answer 1

Step-by-step explanation:

To calculate the present value of $50,000 to be received in 10 years at an annual interest rate of 4%, we can use the present value of $1 table in Exhibit 5. The present value factor for 10 years at 4% is 0.6756 . Therefore, the present value of $50,000 is:

$50,000 x 0.6756 = $33,780

The present value is less than the $50,000 to be received in the future because of the time value of money. Money received in the future is worth less than money received today because of inflation and the opportunity cost of not having that money available to invest today . Therefore, we need to discount the future value of money to its present value using an appropriate interest rate.

I hope this helps you with your calculations!

Answer 2

a. Using the present value of $1 table with a 4% interest rate and 10 periods, the present value factor is 0.6756. Therefore, the present value of $50,000 is:

Present value = $50,000 x 0.6756 = $33,780 (rounded to the nearest whole dollar)

b. The present value is less than $50,000 because of the time value of money. The 4% interest rate assumes that the money can be invested to earn a return over the 10 years. Therefore, the present value represents the amount of money that would need to be invested today to grow to $50,000 in 10 years at a 4% interest rate. Additionally, inflation reduces the purchasing power of money over time, which is another reason why the present value is less than the future value.