Part 1Dr. John Whitten is still figuring on his equipment fund. According to his calculations he needs $250,000 to be accumulated six years from now. John is now trying to find the present value of the $250,000. He continues to assume an interest rate of 5 percent.

Required Compute the present value of $250,000 accumulated fifteen years from now. Assume an interest rate of 5 percent. (Use the Present Value Table.)

Part 2John doesnt like the answer he gets. What, he thinks, if he can raise the interest rate to 7 percent? How much difference would that make?

Required Compute the present value of $250,000 accumulated fifteen years from now assuming an interest rate of 7 percent. Compare the difference between this amount and the present value at 5 percent.

Step 1. Refer to the Present Value Table found in Appendix 12A. Reading across, or horizontally, find the 5% column. Reading down, or vertically, find Year 6. Trace across the Year 6 line item to the 5% column. The factor is 0.7462.

Step 2. Multiply $250,000 times the factor of 0.7462 to find the present value of $186,550.

Part 2

Step 1. Refer to the Present Value Table. Reading across, or horizontally, find the 7% column. Reading down, or vertically, find Year 6. Trace across the year 6 line item to the 7% column. The factor is 0.6663.

Step 2. Multiply $250,000 times the factor of 0.6663 to find the present value of $166,575.

Step 3. The difference in present value between rates of 5% and 7% amounts to $19,975 or about $20,000.