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    PV of Accounts, PV of Income Stream & Discounted Value Gold Mine

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    A. Suppose your bank account will be worth $15,000.00 in one year. The interest rate (discount rate) that the bank pays is 7%. What is the present value of your bank account today? What would the present value of the account be if the discount rate is only 4%?

    B. Suppose you have two bank accounts, one called Account A and another Account B. Account A will be worth $6,500.00 in one year. Account B will be worth $12,600.00 in two years. Both accounts earn 6% interest. What is the present value of each of these accounts?

    C. Suppose you just inherited an gold mine. This gold mine is believed to have three years worth of gold deposit. Here is how much income this gold mine is projected to bring you each year for the next three years:

    Year 1: $49,000,000
    Year 2: $61,000,000
    Year 3: $85,000,000

    Compute the present value of this stream of income at a discount rate of 7%. Remember, you are calculating the present value for a whole stream of income, i.e. the total value of receiving all three payments (how much you would pay right now to receive these three payments in the future). Your answer should be one number - the present value for this gold mine at a 7% discount rate but you have to show how you got to this number.

    Now compute the present value of the income stream from the gold mine at a discount rate of 5%, and at a discount rate of 3%. Compare the present values of the income stream under the three discount rates and write a short paragraph with conclusions from the computations.

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    Solution Preview

    A. Use the compound interest formula to calculate the present value (PV)
    PV = FV/(1+rate)^n where
    FV = future value = 15,000
    rate = 7%
    n= time period = 1 year
    PV = 15,000/(1+7%)^1 = 14,018.69
    At 4% rate
    PV = 15,000/(1+4%)^1 = 14,423.08

    B. Using the same formula
    Account A -
    Present ...

    Solution Summary

    The solution discusses PV of accounts, PV of income stream and discounted value gold mine.