[laurac]

A company must repay the bank $10,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The present value of the loan is:

from the formula I had I got 10,000/.7938 = 12,597.63 ( which is wrong!) and I know you don't multiply 10,000 * .7938.

Thanks!

[morgaine300]

Actually, yes you do multiply. The present value of a lump sum is going to be smaller. I think you are probably looking at it backwards. i.e. you're used to being told that $10,000 was borrowed, and a higher amount would be paid back later, so you're expecting a higher amount.

But that isn't the case here. They are telling you what will be paid back 3 years from now. That pay-back is going to include the interest that has accrued in the meantime. So the amount originally borrowed is lower than $10,000.

When you're working with lump sums (i.e. not annuities, or series of payments), the present value is what it is worth today, and it will grow into a future value. So the present value is going to be a smaller number. If it was just a matter of interpreting the problem, keep that in mind. It specifically asks for the present value, and that has to come out smaller.