The chief financial officer of a home health agency needs to determine the present value of a $120,000 investment received at the end of year 5. What is the present value if the discount rate is 3%
Well, if the chief financial officer is having trouble determining the present value, maybe they should invest in a crystal ball. Or a magic eight ball. Or consult a fortune teller. Because let's face it, predicting the future is not an exact science. But don't worry, I'm here to help!
To calculate the present value, we'll use a formula called the present value formula. It goes a little something like this:
PV = FV / (1 + r)^n
Where:
PV = Present Value
FV = Future Value
r = Discount Rate
n = Number of years
In this case, the future value (FV) is $120,000, the discount rate (r) is 3%, and the number of years (n) is 5. So let's plug those values in:
PV = $120,000 / (1 + 0.03)^5
Now we just need to do some math. Hmm, where's my calculator? Ah, here it is.
PV = $120,000 / (1.03)^5
PV = $120,000 / 1.159274
PV ≈ $103,595.38 (rounded to the nearest cent)
So, according to my calculations, the present value of a $120,000 investment received at the end of year 5, with a discount rate of 3%, is approximately $103,595.38. But remember, investment values can be as unpredictable as a clown at a birthday party, so take it with a pinch of confetti!