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Activity: Evaluating Statements on Present Value
This activity involves using a table that shows the present values of a future $1 payment, discounted at different rates, to assess a series of statements and determine which are correct.
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
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Activity: Evaluating Statements on Present Value
Analyze each scenario and match it to the institutional concept it best exemplifies. Note that some concepts may be used more than once.
A recent graduate is offered a signing bonus for a new job with two payment options. Option A is to receive $5,000 immediately. Option B is to receive $5,500 in exactly two years. If the graduate's personal annual discount rate is 8%, which option has a higher present value and is therefore the financially superior choice?
Calculating the Present Value of a Future Prize
An investment promises a guaranteed payout of $10,000 in exactly five years. Four different investors are evaluating this opportunity, each with a different personal annual discount rate reflecting their individual valuation of future money. Which investor will calculate the lowest present value for this future payout?
An investment promises a guaranteed payout of $10,000 in exactly five years. Four different investors are evaluating this opportunity, each with a different personal annual discount rate reflecting their individual valuation of future money. Which investor will calculate the lowest present value for this future payout?
Holding the annual discount rate constant, the present value of a $1,000 payment to be received in 5 years is greater than the present value of the same $1,000 payment to be received in 10 years.
Investment Decision for a Small Business
A student is calculating the present value of a $1,000 payment they will receive in 5 years, using a 10% annual discount rate. They perform the following calculation: $1,000 x (1.10)^5 = $1,610.51, and conclude the money is worth more today than in the future. What is the primary conceptual error in the student's approach?
A company is evaluating two potential investments. Investment A will yield a guaranteed return of $50,000 in 3 years. Investment B will yield the same guaranteed return of $50,000, but in 7 years. How will an increase in the annual discount rate affect the calculated present value of these two investments?
To find the present value of a future sum of money, you must apply a series of calculations using the future value, the number of time periods, and the discount rate. Arrange the following mathematical operations in the correct sequence.
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The table below shows the present value of a $1 payment to be received at a future date, given different time periods and annual discount rates.
Present Value of a Future $1 Payment
Years in Future 4% Discount Rate 6% Discount Rate 8% Discount Rate 5 $0.822 $0.747 $0.681 10 $0.676 $0.558 $0.463 15 $0.555 $0.417 $0.315 Based only on the information in this table, which of the following statements correctly describes a relationship between these factors?
Investment Decision Analysis
An investor is using the table below to compare two different investment options, each offering a single future payout.
Present Value of a Future $1 Payment
Years in Future 3% Discount Rate 5% Discount Rate 7% Discount Rate 5 $0.863 $0.784 $0.713 10 $0.744 $0.614 $0.508 15 $0.642 $0.481 $0.362 - Option X offers a $10,000 payment in 10 years, evaluated with a 7% discount rate.
- Option Y offers a $10,000 payment in 15 years, evaluated with a 3% discount rate.
Based on an analysis of the present values derived from this table, which statement is correct?
The table below shows the present value of a $1 payment to be received at a future date, given different time periods and annual discount rates.
Present Value of a Future $1 Payment
Years in Future 2% Discount Rate 5% Discount Rate 8% Discount Rate 5 $0.906 $0.784 $0.681 10 $0.820 $0.614 $0.463 15 $0.743 $0.481 $0.315 Statement: Based on the data in the table, a $1 payment received 15 years from now with a 2% discount rate has a higher present value than a $1 payment received 5 years from now with a 5% discount rate.
Resolving an Investment Disagreement
Evaluating an Investment Principle
You are an analyst evaluating several investment proposals. Using the provided present value table, match each investment proposal to the correct statement about its value.
Present Value of a Future $1 Payment
Years in Future 3% Discount Rate 6% Discount Rate 9% Discount Rate 5 $0.863 $0.747 $0.650 10 $0.744 $0.558 $0.422 20 $0.554 $0.312 $0.178 The table below shows the present value of a future $1 payment. You are set to receive a trust fund payment of $25,000 in 10 years. If the appropriate annual discount rate is 6%, the present value of your trust fund is $______. (Use the table for your calculation and enter a whole number without commas or symbols.)
Present Value of a Future $1 Payment
Years in Future 4% Discount Rate 6% Discount Rate 8% Discount Rate 5 $0.822 $0.747 $0.681 10 $0.676 $0.558 $0.463 15 $0.555 $0.417 $0.315 A financial advisor is evaluating four different investment opportunities for a client. Using the provided table, calculate the present value of each option and arrange them in order from the highest present value to the lowest present value.
Present Value of a Future $1 Payment
Years in Future 4% Discount Rate 6% Discount Rate 8% Discount Rate 5 $0.822 $0.747 $0.681 10 $0.676 $0.558 $0.463 15 $0.555 $0.417 $0.315 Resolving an Investment Disagreement