Thread: Future Value and Present Value Questions

1. Future Value and Present Value Questions

I have arrived at the answers for the questions below but I am not entirely sure if they are correct. The math works out but these questions appear to be trick questions because they list a lot of irrelavant information and i am not confident on my answers. can anyone help verify and confirm?

Q1:

Use the following 8% interest factors

Present Value of
Future Value of

Ordinary Annuity
Ordinary Annuity

7 periods
5.2064
8.92280
8 periods
5.7466
10.63663
9 periods
6.2469
12.48756

What amount should be recorded as the cost of a machine purchased December 31, 2006, which is to be financed by making 8 annual payments of $6,000 each beginning December 31, 2007? The applicable interest rate is 8%. a)$42,000

b) $37,481 c)$63,820

d) $34,480 ANS: I simply calculated the present value of an ordinary annuity = R x (PVF-OA at 8 periods, 8 %) = 6000 x 5.7466 = 34,480 So i think d) is the answer. However, I have no idea why they list amounts for 7 and 9 periods and the Future value of Ordinary Annuity. Q2: Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of$21,000 for 15 years and to have a resale value of $40,000 at the end of that period. Assume a 10% rate and earnings at year end. The present value of 1 at 10% for 15 periods is .23939. The present value of an ordinary annuity at 10% for 15 periods is 7.60608. The future value of 1 at 10% for 15 periods is 4.17725. a)$159,728

b) $169,303 c)$185,276

d) \$324,576

Again, I am not sure what information i should be using... but i simply used the present value equation with R = 21,000.

present value = R x (PVF-OA, at 15 periods @ 10%)
= 21,000 x 7.60608
= a) 159,728

However, I am curious as to why this problem gives us a resale value of 40,000. Does that play into the factor of solving this problem???

2. For present value factors check, go here:

Annuity Immediate Present Value

Future value factors:

Annuity Immediate Accumulated Value

For your depreciation problem, what depreciation method are you using?

3. Thanks for the links but I already know how the calculate the present and future value. The question itself also provides the figures. I am more concerned about how to approach the problem with this given information.

As for depreciation, there is no depreciation method listed in the question so I don't think that is relevant.

4. I think for question 1, they just give you the extraneous info to see if you are paying attention.

For Q2, the answer is B. Resale value is part of your income stream. Discount the 40,000 @ 10% back 15 years = 40,000/4.177248169. Add that to your original answer and you will get B.

5. Thanks mathceleb,

That was the key was knowing the discount of the resale value as you pointed out:

"Discount the 40,000 @ 10% back 15 years = 40,000/4.177248169"

*So if I am understanding this correctly, if we want to find the present value of an item, we would ALWAYS divide it by its "Future Value" for that given period of time?

Thank you so much for your help.

6. Yes, for the most part. Essentially, when comparing sale prices or values of a stream or outputs, I like to discount them back to starting time. That accounts for interest and time for any stream of payments.

7. Originally Posted by ecstyle
divide it by its "Future Value"
I do not disagree with mathceleb, but I do fail to understand what this statement means.

One would discount the future value in order to obtain the present value. There is no dividing by future value in this concept.