Chapter 16, Problem 2E

Exercise 10-2A Determining the present value of a lump-sum future cash receipt

Larry Mattingly turned 20 years old today. His grandfather had established a trust fund that will pay him $120,000 on his next birthday. However, Larry needs money today to start his college education, and his father is willing to help. Mr. Mattingly has agreed to give Larry the present value of the $120,000 future cash inflow, assuming a 6 percent rate of return.

Required

Round your figures to the nearest whole dollar.

1. a. Use a present value table to determine the amount of cash that Larry Mattingly’s father should give him.
2. b. Use an algebraic formula to prove that the present value of the trust fund (the amount of cash computed in Requirement a) is equal to its $120,000 future value.