Chapter 27, Problem 1QR

To determine

Calculation of present value of money.

Explanation of Solution

The present value of $200 can be calculated as follows:

$\begin{array}{c}\text{Present value}=\frac{\text{Future value}}{{\left(1+\text{Interest}\right)}^2}\\ =\frac{200}{{\left(1+0.07\right)}^{10}}\\ =\frac{200}{1.9672}\\ =101.67\end{array}$

The present value is $101.67.

The present value of $300 can be calculated as follows:

$\begin{array}{c}\text{Present value}=\frac{\text{Future value}}{{\left(1+\text{Interest}\right)}^2}\\ =\frac{300}{{\left(1+0.07\right)}^{20}}\\ =\frac{300}{3.8697}\\ =77.53\end{array}$

The present value is $77.53.

Economics Concept Introduction

Concept introduction:

Present value: Thepresent value refers to the today’s value of the future amount that adjusted with the existing interest rate.