What is the present value of $1,000 to be received in 3 years discounted at 5% annually?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

What is the present value of $1,000 to be received in 3 years discounted at 5% annually?

Explanation:
The idea being tested is how the time value of money works: future cash is worth less today when you discount it at a given rate. To find the present value, you divide the future amount by (1 + r) raised to the power of the number of years. Here, r is 5% and the time is 3 years, so compute (1.05)^3 = 1.157625. Then present value = 1000 / 1.157625 ≈ 863.84. So the amount today, given a 5% annual discount for 3 years, is about $863.84. The other numbers would come from discounting for a different time period (for example, one year gives about 952.38) rather than three years at 5%.

The idea being tested is how the time value of money works: future cash is worth less today when you discount it at a given rate. To find the present value, you divide the future amount by (1 + r) raised to the power of the number of years. Here, r is 5% and the time is 3 years, so compute (1.05)^3 = 1.157625. Then present value = 1000 / 1.157625 ≈ 863.84. So the amount today, given a 5% annual discount for 3 years, is about $863.84. The other numbers would come from discounting for a different time period (for example, one year gives about 952.38) rather than three years at 5%.

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