Answered: 5. Present value 1. To find the…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

ChapterM: Time Value Of Money Module

Section: Chapter Questions

Problem 3MC: Refer to the present value table information on the previous page. If Kathleen put 3,000 in a...

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5. Present value

1. To find the present value of a cash flow expected to be paid or received in the future, you will _________ the future value cash flow by

2. What is the value today of a $12,000 cash flow expected to be received seventeen years from now based on an annual interest rate of 7%?

$37,906
$5,888
$3,799
$4,749

3. Your broker called earlier today and offered you the opportunity to invest in a security. As a friend, she suggested that you compare the current, or present value, cost of the security and the discounted value of its expected future cash flows before deciding whether or not to invest.

The decision rule that should be used to decide whether or not to invest should be:

everything else being equal, you should invest if the discounted value of the security’s expected future cash flows is greater than or equal to the current cost of the security.

everything else being equal, you should invest if the discounted value of the security’s expected future cash flows is greater than or equal to the current cost of the security.
everything else being equal, you should invest if the present value of the security’s expected future cash flows is less than the current cost of the security.
everything else being equal, you should invest if the current cost of the security is greater than the present value of the security’s expected future cash flows.

4. Now that you’ve thought about the decision rule that should be applied to your decision, apply it to the following security offered by your broker:

Jing Associates, LLC, a large law firm in Denver, is building a new office complex. To pay for the construction, Jing Associates is selling a security that will pay the investor the lump sum of $23,000 in two years. The current market price of the security is $14,245.

Assuming that you can earn an annual return of 8.50% on your next most attractive investment, how much is the security worth to you today?

$19,537
$24,421
$16,606

From strictly a financial perspective, should you invest in the Jing security?

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