1. Present value concept Answer each of the following questions. What single investment made
today, earning 12% annual interest, will be worth $6,000 at the end of 6 years? What is the
present value of $6,000 to he received at the end of 6 years if the discount rate is 12%? What is
the most you would pay today for a promise to repay you $6,000 at d* end of 6 years if your
opportunity cost is 12%? Compare, contrast, and discuss your findings in parts a through c.
Solution
Part a
We have:
FV = 6000
N= 6
R= 12%
We can use following formula to calculate pv:
PV = FV / (1+r)^n
= 6000/ (1+0.12)^6
= 6000 / 1.12^6
= $3039.79
So they need to invest $3039.79 to accumulate $6,000 in 6 years.
Part b
We have:
FV = 6000

2. N= 6
R= 12%
We can use following formula to calculate pv:
PV = FV / (1+r)^n
= 6000/ (1+0.12)^6
= 6000 / 1.12^6
= $3039.79
Hence, PV of $6000 would be $3039.79.
Part c
We have:
FV = 6000
N= 6
R= 12%
We can use following formula to calculate pv:
PV = FV / (1+r)^n
= 6000/ (1+0.12)^6
= 6000 / 1.12^6
= $3039.79
I would be willing to pay $3039.79 for a promise of $6000 repayment in 6 years.
Part d
All parts from a-c has the same thing to calculate, they differ only in the manner of asking
question.