## Description

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

three years:

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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