What is the present value today of receiving $700 in 3 years if the annual discount rate is 8%?

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Prepare for the Accounting for Planning and Control Test 1 with our comprehensive quiz. Utilize flashcards and multiple-choice questions to solidify your understanding. Each question includes hints and detailed explanations to ensure you are exam-ready!

Multiple Choice

What is the present value today of receiving $700 in 3 years if the annual discount rate is 8%?

Explanation:
Time value of money is the idea that a sum available today is worth more than the same sum in the future because it can earn interest. To bring a future amount back to today, you divide by the accumulation factor: present value = future value / (1 + r)^t. Here, the future amount is 700, the annual discount rate is 8%, and the time is 3 years. Compute (1.08)^3 = 1.259712. Then present value = 700 / 1.259712 ≈ 555.9, which rounds to about 556. So the present value today is roughly $556.

Time value of money is the idea that a sum available today is worth more than the same sum in the future because it can earn interest. To bring a future amount back to today, you divide by the accumulation factor: present value = future value / (1 + r)^t.

Here, the future amount is 700, the annual discount rate is 8%, and the time is 3 years. Compute (1.08)^3 = 1.259712. Then present value = 700 / 1.259712 ≈ 555.9, which rounds to about 556.

So the present value today is roughly $556.

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