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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Present value of amounts due

Tommy John is going to receive $1,000,000 in three years. The current market rate of interest is 10%.

a. Using the present value of $1 table in Exhibit 8, determine the present value of this amount compounded annually.

b. Why is the present value less than the $1,000,000 to be received in the future?

(a)

To determine

Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.

To calculate: The present value of $1,000,000 (Future amount).

Explanation

Calculate the present value of $1,000,000 (Future amount).

Present value=(Future amount×Present value of $1for 3 pe

(b)

To determine

To explain: The reason why present value of $751,310 is less than the future value of $1,000,000.

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