1. Suppose your bank account will be worth $4,200.00 in one year. The interest rate (discount rate) that the bank pays is 5%. What is the present value of your bank account today?
2. Suppose you have two bank accounts, one called Account A and another Account B. Account A will be worth $3,800.00 in one year. Account B will be worth $6,500.00 in two years. Both accounts earn 5% interest. What is the present value of each of these accounts?
What is the combined present value of the two accounts?
3. Suppose you just inherited an oil well. This oil well is believed to have three years worth of oil left before it dries up. Here is how much income this oil well is projected to bring you each year for the next three years:
- Year 1: $125,000
- Year 2: $258,000
- Year 3: $310,000
Compute the present value of this stream of income using a discount rate of 7%. Remember, you are calculating the present value for a whole stream of income, i.e. the total value of receiving all three payments (how much you would pay right now to receive these three payments in the future). Your answer should be one number - the present value for this oil well at a 7% discount rate.