Results 1 to 7 of 7

Math Help - Future Value and Present Value Questions

  1. #1
    Newbie
    Joined
    May 2008
    Posts
    8

    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???
    Follow Math Help Forum on Facebook and Google+

  2. #2
    Senior Member
    Joined
    Feb 2008
    From
    Berkeley, Illinois
    Posts
    364
    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?
    Last edited by mathceleb; April 22nd 2009 at 06:41 AM.
    Follow Math Help Forum on Facebook and Google+

  3. #3
    Newbie
    Joined
    May 2008
    Posts
    8
    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.
    Follow Math Help Forum on Facebook and Google+

  4. #4
    Senior Member
    Joined
    Feb 2008
    From
    Berkeley, Illinois
    Posts
    364
    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.
    Follow Math Help Forum on Facebook and Google+

  5. #5
    Newbie
    Joined
    May 2008
    Posts
    8
    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.
    Last edited by ecstyle; May 21st 2008 at 11:05 PM.
    Follow Math Help Forum on Facebook and Google+

  6. #6
    Senior Member
    Joined
    Feb 2008
    From
    Berkeley, Illinois
    Posts
    364
    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.
    Follow Math Help Forum on Facebook and Google+

  7. #7
    MHF Contributor
    Joined
    Aug 2007
    From
    USA
    Posts
    3,111
    Thanks
    2
    Quote Originally Posted by ecstyle View Post
    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.
    Follow Math Help Forum on Facebook and Google+

Similar Math Help Forum Discussions

  1. Future and Present Value
    Posted in the Business Math Forum
    Replies: 1
    Last Post: March 1st 2010, 03:31 PM
  2. Future / Present Value?
    Posted in the Business Math Forum
    Replies: 1
    Last Post: January 25th 2010, 04:38 AM
  3. Future and present value
    Posted in the Algebra Forum
    Replies: 0
    Last Post: October 4th 2009, 12:11 PM
  4. Present , future value
    Posted in the Business Math Forum
    Replies: 1
    Last Post: July 13th 2009, 04:23 PM
  5. Replies: 0
    Last Post: January 20th 2009, 03:34 PM

Search Tags


/mathhelpforum @mathhelpforum