1. Ronen Consulting has just realized an accounting error that has resulted in a

Question

1. Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $375,000 due in 25 years, they will need $375,000 in 25 years. Toni Flanders, the company's CEO, is scrambling to discount the liability to the present to assist in valuing the firm's stock. If the appropriate discount rate is 6 percent, what is the present value of the liability?

If the appropriate discount rate is 6 percent, the present value of the $375,000 liability due in 25 years is ?

(Related to Checkpoint 5.2) (Future value) Leslie Mosallam, who recently sold her Porsche, placed $9,800 in a savings account paying annual compound interest of 6 percent. a. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 3, 7, and 17 year(s). b. Suppose Leslie moves her money into an account that pays 8 percent or one that pays 10 percent. Rework part (a) using 8 percent and 10 percent. c. What conclusions can you draw about the relationship between interest rates, time, and future sums from the calculations you just did?

Explanation / Answer

The present value of $3,75,000 due in 25 years at the discount rate is -

Present Value = $3,75,000 * Present value of discounted Factor ( 6%, 25 year)

Present Value = $3,75,000 * 0.233

Present value = $87,374.49.

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