Present Value Question

Submitted by Jgrind07 on Mon, 05/13/2013 - 00:11

A Present value question from Techfaq360:

What is the present value if the organization expects to make $500,000 three years from now and the annual interest rate is 4 percent?


1.  $4000

2.  $5000

3.  $25000

4.  $4500

Correct Answer is : 1

A is the correct answer.
Present Value = FV/(1+R)n. FV is the future value, R is the interest rate, and n is the number of time periods. 500000/(5*5*5) = 4000.

The above solution was provided by the author. Are the calulation and the answer correct?

I was trying to solve this as follows:

500000/(1+0.04)+500000/(1+0.04)^2+500000/(1+0.04)^3 which gave me none of the choices listed.

Please explain it

Thanks

Jai

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PMP / CAPM exam Question bank
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crushPMP's picture

crushPMP

Mon, 05/13/2013 - 01:42

The question say's 3 year from now (and not 500K every year), so you use the method I have done below.

500/ (1.04)^3 = 444.498179335 = Ans is D?

I don't understand their solution. Where have they used the 4% discount rate and why are they multiplying 5 three times in the denominator!

pmpcracker

Mon, 05/13/2013 - 02:00

 is it 444.498 K ?  it is no way near to the option D

 

Jgrind07

Mon, 05/13/2013 - 02:35

As I explained, the answer is Option A i.e. 4000. Please refer the claculation that was given by the author. I think the calculation is wrong there.

This is the sloutioin provided:

FV is the future value, R is the interest rate, and n is the number of time periods. 500000/(5*5*5) = 4000.

Here in the formula, the intrest rate 4 was added directly to 1 which comes to 5 (1+4 ) in the denominator. ie 500000/(5*5*5). Is this correct?

Thanks

Jai

Jgrind07

Mon, 05/13/2013 - 03:04

That is exactly my question. Why 4 is added to 1 directly? where as it supposed to be 0.04

cnpatilpmp2012 (not verified)

Mon, 05/13/2013 - 07:36

I'm not referrign to the above quetsion, it's general thing thought will correct.


FYI..It should be calculated every year separately for 3 years..you used interger as 3 directly..this would give wrong results.


PV=FV/ (1+i)^1 + FV/(1+i)^2 + FV/(1+i)^3..this is the right way creating


anyone thinks differently...please correct me If I'm wrong.


Regards


CN Patil

crushPMP's picture

crushPMP

Mon, 05/13/2013 - 13:37

You can use this formula only when they say that you are going to receive the cash-flow every year for the next 3 years. In that case the below Time Value of Money (TVM) calculation would make sense.


PV=FV1/ (1+i)^1 + FV2/(1+i)^2 + FV3/(1+i)^3


In this case, you just get one cashflow at the end of the 3rd year, then you would use.


PV= FV/(1+i)^3