Imagine you have a winning lottery ticket that states that you have the option o
ID: 2525330 • Letter: I
Question
Imagine you have a winning lottery ticket that states that you have the option of taking $10,000 three years from now (three periods) or taking the present value of the winnings now. The state uses an 8% rate of discounting. If you take the winnings now, how much would you receive? A) $25,771.00 B) $12,597.10 C) $7,938.30 D) $7,950.00 University just signed a capital lease contract for new equipment that requires rental payments of $6,000 each, to be paid at the end of the next 5 years. The appropriate discount rate is 12%, what is the present value of the rental payments? A) $53,179.50 B) $38,117.10 C) $36,000.00 D) $21,628.68Explanation / Answer
1. The state uses discounting factor 8%. If we take the money after 3 years then we receive $10000.
To calculate present value we have to findout the corresponding factor from the discounting table. It clearly shows that present value of Rs.1 for a period of 3 years at 8% discounting factor is .79383. (Table no-3, present value)
So, Present value of $10000 will be $10000*.79383= $7938.30
Answer is Option C.
2. To calculate we have to calculate value for each year for $6000.
Answer is Option D
QNO.3.
To calculate future value we have to findout the corresponding factor from the discounting table. It clearly shows that present value of Rs.1 for a period of 18years at 6% discounting factor is 2.85434. (Table no-1, present value)
So, Future value of $20000 will be $20000*2.85434= $56087.80
Answer is Option A.
4. To calculate future valueof an annuity we have to findout the corresponding factor from the discounting table. It clearly shows that present value of Rs.1 for a period of 4 years at 6% discounting factor is 4.3746. (Table no-1, Future value of an annuity)
So, Future value of $2500 will be $20000*4.37462= $10936.55
Answer is Option B.
YEAR Payment Dis. Factor for Rs.1 Present Value Present value 1 6000 0.89286 5357.16 2 6000 0.79719 4783.14 3 6000 0.71178 4270.68 4 6000 0.63552 3813.12 5 6000 0.56743 3404.58 TOTAL 30000 21628.68Related Questions
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