Tommy John is going to receive $1,000,000 in three years. The current market rate of interest is 10%.

Tommy John is going to receive $1,000,000 in three years. The current market rate of interest is 10%.

a. Using the present value of $1 table in Exhibit 4, determine the present value of this amount compounded annually.

b. Why is the present value less than the $1,000,000 to be received in the future?


Answer:
$1,000,000 × 0.75131 = $751,310

Cash on hand today can be invested to earn income. If $751,315 is invested at 10%, it will be worth $1,000,000 at the end of three years.