Present Value of Amounts Due Assume that you are going to receive $520,000 in 10
ID: 2535962 • Letter: P
Question
Present Value of Amounts Due
Assume that you are going to receive $520,000 in 10 years. The current market rate of interest is 13%, compounded annually.
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 $520,000 to be received in the future?
The present value is less due to the compounding of interest over the 10 years.
https://college.cengage.com/geyser/warren_9781337119207/images/ch11/exhibt-5.gif
Explanation / Answer
a) Future Value=$520,000
No of years = 10 years
Rate of interest =13% compounded annually
Present Value = $153,186.8 (520,000* 0.29459)
b)The present value is less due to the compounding of interest over the 10 years. Every year the present value of $153,186.8 will grow by 13% for next 10 years and at the end of the 10th year the value will be $520,000