ACC 202 - present value discussion questions

Discussion Questions for Present Value Concepts

1. Read these two statements: a. John invests $1,000 today at 6%. How much will John's investment grow to in five years? b. Mary is looking at an investment that will pay her $4,000 in two years. How much should Mary pay for this investment if she demands a rate of return of 6%? Which one of these is a future value problem? Which one is a present value problem?

2. Referring to Question 1, answer statement a; then answer statement b.

3. Bill invests $1,000 today at 8% interest. We want to calculate the amount this investment will grow to in 20 years. Can you create formula that will compute this future value?

4. Fill in the following table:

5. Find the following present values.

a. The present value of $10,000 to be received in 3 years, discounted at 8%...and

b. the present value of $5,000 to be received in 3 years discounted at 8%. Can you prove that your answers are correct?

Mathematical proof for a. and b.

6. Tom is looking at an investment that will pay Tom $1,000 per year for three years. Sketch out the cash flows for this investment in years 1, 2 and 3. If Tom demands a rate of return of 6% for this investment, how much should Tom invest to get it? (Use the Present Value of $1 table to solve this problem; discount each cash flow separately and add them together.)

7. Define the term "annuity." Is Question 6 an annuity situation?

8. Solve Question 6 using the Annuity Table (Present Value of a Series of $1 Cash Flows), with interest rate of 6% for three years.

9. Compare the results of Questions 6 and 8. Are they the same answer? (Hope so!)

10. What is the relationship between the Present Value of $1 table and the Present Value of an Annuity of $1 table? Can you fill in the following table?

11. Donna is looking at an investment that will return $3,000 per year for 3 years. Her investment goal is a 10% yield on this investment. She calculates the PV of the annuity and arrives at a PV of $7,461. Can you prove that her calculation is correct?

12. Can you fill in the 5% column of this table, using the PV of Annuity formula?

PV = PMT [(1 - (1 / (1 + i)^n )) / i]

                                                          
13. Do you have questions about this lesson?  Let me know.  Thank you.