Question

The 2-year discount factor is 0.80. a. What is the present value of $1 to be received in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the present value of $2,850? (Do not round intermediate calculations.)

Answer 1

a. PV=$0.31

b. PV=$879.63

Explanation:

PV = F / [ (1 + r)^n ]

where

PV = Present Value,

F = Future payment (cash flow),

r = Discount rate=0.80

n = the number of periods in the future=2

a. F=$1

PV = 1/[(1 + 0.8)^ 2]

=1/ [1.8]^2

=1/3.24 =$0.31

b. F=$2,850

PV = 2850/[(1 + 0.80)^ 2]

=2850/ [1.8]^2

=2850/ 3.24

=$879.63