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Math Help - Present Value

  1. #1
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    Present Value

    Anyone out there that knows how to do present value and show the work. I was given a question: Suppose you just inherited an gold mine. This gold mine is believed to have three years worth of gold deposit. Here is how much income this gold mine is projected to bring you each year for the next three years:
    Year 1: $42,000,000
    Year 2: $62,000,000
    Year 3: $99,000,000
    Compute the present value of this stream of income at a discount rate of 8%. 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 8% discount rate but you have to show how you got to this number.
    Now compute the present value of the income stream from the gold mine at a discount rate of 6%, and at a discount rate of 4%. Compare the present values of the income stream under the three discount rates and write a short paragraph with conclusions from the computations.

    I some what understand the concepts but getting to the answer especially with showing work I can't do.
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  2. #2
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    You can use this formula for future and present value:
    PV=\sum_{j=1}^{n}\frac{FV_k}{(1+\mu)^{j}}\,;\;\mu\  geq0,j\in\mathbb{N}
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  3. #3
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    Quote Originally Posted by Craig7sc View Post
    Anyone out there that knows how to do present value and show the work. I was given a question: Suppose you just inherited an gold mine. This gold mine is believed to have three years worth of gold deposit. Here is how much income this gold mine is projected to bring you each year for the next three years:
    Year 1: $42,000,000
    Year 2: $62,000,000
    Year 3: $99,000,000
    Compute the present value of this stream of income at a discount rate of 8%. 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 8% discount rate but you have to show how you got to this number.
    Now compute the present value of the income stream from the gold mine at a discount rate of 6%, and at a discount rate of 4%. Compare the present values of the income stream under the three discount rates and write a short paragraph with conclusions from the computations.

    I some what understand the concepts but getting to the answer especially with showing work I can't do.
    Craig, you need to use multiple cash flows valuation in this problem and future value discounting This formula might help you

    Consider you found an investment that pays 15% annual interest, which sounds fantastic to you! This makes you invest $1000 in to it, how much will you have in 3 years? How much will you have in 7 years? And at the end of 7 years, how much interest will you have earned, and how much of it will be compounding interest?
    Note: We recommend you try this problem without looking at the solution below first, however if you get stuck, feel free to take a peak!

    Future Value = $1 x (1 + r)t = =$1 x (1 + 0.15)3 = $1.153 = 1.520875 x $1000 = $1,520.875
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