Question

​(Related to Checkpoint​ 5.4) ​ (Present value)  Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of ​$385,000 due in 25 years. In other​ words, they will need ​$385,000 in 25 years. Toni​ Flanders, the​ company's CEO, is scrambling to discount the liability to the present to assist in valuing the​ firm's stock. If the appropriate discount rate is 9 ​percent, what is the present value of the​ liability? If the appropriate discount rate is 9 ​percent, the present value of the ​$385 ,000 liability due in 25 years is $ ? ​ (Round to the nearest​ cent.)

Answer 1

Given:

Future Value (FV)= $385,000

Time (t)= 25 years

Interest rate= 9%

Formula for computing present value:

Present Value (PV)=FV/(1+r)^t

PV= $385,000/(1+0.09)^25

      = $44,647.62

Therefore, the present value of the liability of $385,000 due in 25 years is $44,647.62.

This can also be solved using a financial calculator by imputing the below into the calculator:

FV= $385,000; I/Y= 9; N= 25

Then press the button PV to get the present value amount.

I hope that was helpful :)