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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?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 17E
Textbook Problem
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Tommy John is going to receive $1,000,000 in three years. The current market rate of interest is 10%.

  1. a. Using the present value of $1 table in Exhibit 8, determine the present value of this amount compounded annually.
  2. b. Why is the present value less than the $1,000,000 to be received in the future?

(a)

To determine

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

Explanation of Solution

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.

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

Present value=(Future amount×Present value of $1Ȁ

(b)

To determine

Explain the reason why present value of $751,310 is less than the future value of $1,000,000.

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Chapter 14 Solutions

Financial Accounting
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