Suppose your bank account will be worth $4,200.00 in one
year. The interest rate (discount rate) that the bank pays is 5%. What is the
present value of your bank account today?
Suppose you have two bank accounts, one called Account A and
another Account B. Account A will be worth $3,800.00 in one year. Account B
will be worth $6,500.00 in two years. Both accounts earn 5% interest. What is
the present value of each of these accounts? What is the combined present value
of the two accounts?
Suppose you just inherited an oil well. This oil well is
believed to have three years worth of oil left before it dries up. Here is how
much income this oil well is projected to bring you each year for the next
Year 1: $125,000
Year 2: $258,000
Year 3: $310,000
Compute the present value of this stream of income using a
discount rate of 7%. Remember, you are calculating the present value for a
whole stream of income, i.e. the total value of receiving all three payments
(how much you would pay right now to receive these three payments in the
future). Your answer should be one number – the present value for this oil well
at a 7% discount rate.
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