Determine the present value of $200,000 to be received at the end of each of four years, using an interest

Determine the present value of $200,000 to be received at the end of each of four years, using an interest rate of 7%, compounded annually, as follows:

a. By successive computations, using the present value table in Exhibit 4.

b. By using the present value table in Exhibit 5.

c. Why is the present value of the four $200,000 cash receipts less than th $800,000 to be received in the future?


Answer:

a. First Year: $200,000 × 0.93458 =
Second Year: $200,000 × 0.87344 =
Third Year: $200,000 × 0.81630 =
Fourth Year: $200,000 × 0.76290 =
Total present value

b. $200,000 × 3.38721 = $677,442*
*$2 difference between a. and b. is due to rounding.
$186,916
$174,688
$163,260
$152,580
$677,444

c. Cash on hand today can be invested to earn income. If each of the $200,000 of cash receipts is invested at 7%, it will be worth $677,444 at the end of four years.