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What is the present value of $1.00 to be received in three years at an interest rate of 6%?
A$1.19
B$1.06
C$0.89
D$0.84
Answer & Solution
Correct answer: D. $0.84
1. Present value works backwards from a future amount, a process called discounting.
2. Dividing $1.00 by 1.06 gives $0.94 after one year.
3. Dividing again gives $0.89 after two years.
4. Dividing a third time gives $0.84, rounded to the nearest cent.
5. $1.19 runs the arithmetic forwards instead, which gives a future value rather than a present one.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.8 Capital Investment Analysis_
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