[accttutor18]

How do I calculate these? I need detail steps to understand.. How do I use excel for this or a calculator? Our book doesn't give any information on which one to use or even examples of how do do this?


What is the present value of $10,000 due 8 periods from now, discounted at 10%?



What is the present value of $20,000 to be received at the end of each of 6 periods, discounted at 8%?

[morgaine300]

Well, detailed steps is going to be a little difficult since there are four ways you can figure out present values. You either need a factor off charts, or you can use a financial calculator (keeping in mind there can be slight differences between calculators), and there's algebraic equations. And it can be done on Excel, except I don't know how cause I use the equations which is quicker for me. Are you required to use something specific? Does it matter? Do you have a preference?

The only other thing I can tell is some concepts behind them. The present value of something is how much you would have to put into it today to get that specific amount out of it in the future. A "period" is a compounding period. The interest has to be per compounding period, but since the rates are so high, I'll assume they're annual and not even worry about it.

So for the first one, you're looking for how much you would have to put in something today, to get 10,000 out of it, 8 periods from now, at 10%. That means it will compound at 10% 8 times, and grow into $10,000.

Note the difference in the second one. It says $20,000 to be received at the end of each of 6 periods. That's an important statement. It means you are not going to receive $20,000 after six periods. You're going to receive $20,000 six times, once at the end of each of 6 periods. i.e. a series of payments. That's an annuity. An annuity is a series of payments, in equal amounts, made at equal times. As long as it's all equal, you don't have to figure it out 6 times, cause your charts, equations or whatever will have that built in already, but you have to know it's an annuity. So the present value is the amount you would put in something today, to get a series of 6 equal payments of $20,000 each.

Again, how you get the present value depends on method, and I could just pick one, but I could be wasting your time, so you need to say how you want/need to solve these.