Exercise A3-19 Present Values Use Present Value Tables or your calculator to com

Question

Exercise A3-19 Present Values Use Present Value Tables or your calculator to complete the requirements below Krista Kellman has an opportunity to purchase a government security that will pay $200,000 in 5 years. Required: Round your answers to the nearest cent, if rounding is required. 1. Calculate what Krista would pay for the security if the appropriate interest (discount) rate is 6% compounded annually 173,516.10 X 2. Calculate what Krista would pay for the security if the appropriate interest (discount) rate is 10% compounded annually. 164,865.92 X 3. Calculate what Krista would pay for the security if the appropriate interest (discount) rate is 6% compounded semiannually 148,932.15x

Explanation / Answer

Future value =P * (1+r)n

Where,

P= Present value of cash outflow

r = Interest rate = 6%

n= No. of years =5years

Hence ,

200,000= P(1.06)

200,000= P* 1.33822

P= 200,000/1.33822 = $149,452.25

2. Amount payable if appropriate discount rate is 10% compounded annually

200,000= P(1.10)5

200,000= P* 1.61051

P= 200,000/1.61051 = $ 124,184.26

3. Amount payable if appropriate discount rate is 6% compounded semi annually

Semi annual interest rate = 6%*6/12 = 3%

‘n’ will be taken as 10

Hence ,Present value=

200,000= P(1.03)10

200,000= P* 1.34391

P= 200,000/1.34391 = $ 148,819.49

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