Question

6.Your firm has just sold a piece of property for $500,000. But under the sales agreement, it will not receive the $500,000 until 10 years from today. What is it worth today if the discount rate is 6%. (Show your work)

Answer 1

We have to calculate the present value of $500,000 receivable in 10 years

So, Interest rate

= 6%

Time period = 10 years

Present value factor

= 1 / ( 1 + Rate of Interest ) ^ Number of periods

So, PV Factor for 10 years at 6% will be

= 1 / ( 1.06 ) ^ 10

= 1 / 1.790847

= 0.558394

So, Present Value

= Amount receivable x Present value factor

= $500,000 x 0.558395

= $ 279,197.5

So, $ 279,197.5 is the present value and the present worth today for $500,000 receivable in 10 years