Question

6. Three formulas for calculating present value are shown below.Formula #1Formula #2Formula #311PV =FV(1 + i)PVOA = CG--)PVAD = CG--T) +0Ci(1 + i)nti(1+i)nt-1Part 1: Using complete sentences, explain how each of these formulas is used.Part 2: Create an example scenario for at least one of the formulas.(3

Answer 1

SOLUTION:

Case: Present Value

Present Value is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has interest-earning potential.

Part 1

`PV=(FV)/((1+i)^(nt))`

Sentence:

The Present Value is the Future Value divided by 1 is added to the rate of returns(i), raised to the number of periods(nt).

Part 2:

Present Value of Ordinary Annuity

`PVOA=C[(1)/(i)-(1)/(i(1+i)^(nt))]`

C is the annuity payment deposited or received at the end of each period.

i= discount or interest rate per period

n= number of periods.

The factor with interest rate and the number of periods is multiplied by annuity payments

Part 3:

Present value of Annuity due

`PVAD=C[(1)/(i)-(1)/(i(1+i)^(nt-1))]+C`

C is the annuity payment deposited or received at the end of each period.

i= discount or interest rate per period

n= number of periods.

The factor with interest rate and the number of periods less 1 is multiplied by annuity payments and then added again to the annuity payments

Example of Part 1 (Present Value)

What is $56000 in 5 years time worth now, at an interest rate of 10%?