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30 July, 20:43

The 2-year discount factor is 0.80. a. What is the present value of $1 to be received in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the present value of $2,850? (Do not round intermediate calculations.)

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  1. 30 July, 21:02
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    Answer

    a. PV=$0.31

    b. PV=$879.63

    Step-by-step explanation:

    PV = F / [ (1 + r) ^n ]

    where

    PV = Present Value,

    F = Future payment (cash flow),

    r = Discount rate=0.80

    n = the number of periods in the future=2

    a. F=$1

    PV = 1/[ (1 + 0.8) ^ 2]

    =1 / [1.8]^2

    =1/3.24 = $0.31

    b. F=$2,850

    PV = 2850/[ (1 + 0.80) ^ 2]

    =2850 / [1.8]^2

    =2850 / 3.24

    =$879.63
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