Present Value Question:

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 Answers are : 1

Where is the $4000 coming from?

PV (1+r)^n = FV

PV=> FV(1+r)^n

PV = 500000/(1.04*1.04*1.04)

= 444498.17

 I have seen this question in one of the site with 200 questions and choices were obviously wrong 

Those guys messed up by making a fundamental blunder.  For 1+r, they took it as 1+4 = 5 and calculated as 500000/(1+4)^3 instead of   500000/(1+0.04)^3.

 

Chandra

Thanks for the answer....I keep on confusing these formulas:

 PV    =    F V   .      

          -------
          (1+r)ⁿ
FV   =  PV  x (1+r)
NPV = S  (  PV  +    PV +   PV  +   PV   )
           ----     ----   ----    ----  
          (1+r)ⁿ   (1+r)ⁿ  (1+r)ⁿ  (1+r)ⁿ

Remember simple interest and compound interest calculations!  FV is nothing but compound interest calculation

 

Chandra

admin's picture

Chandra - Good response. Liked the way you pointed out the mistake :)