What is the present value of 1,000 to be received in 5 years at a 6% annual discount rate, compounded annually?

What is the present value of 1,000 to be received in 5 years at a 6% annual discount rate, compounded annually?

• A. 700.00
• B. 895.00
• C. 747.26
• D. 780.50

Answer: (C)

Discounting a future amount uses the present value concept: bring the future cash flow back to today by dividing by (1 plus the rate) raised to the number of years. Here, the future value is 1,000, the annual discount rate is 6%, and the time period is 5 years. Calculate (1.06)^5 ≈ 1.33823, then the present value is 1,000 / 1.33823 ≈ 747.26. So the amount needed today to grow to 1,000 in five years at 6% compounded annually is about 747.26. The other options reflect using a different discount factor or treating the rate in a non-compounded way, which isn’t consistent with annual compounding.

Discounting a future amount uses the present value concept: bring the future cash flow back to today by dividing by (1 plus the rate) raised to the number of years. Here, the future value is 1,000, the annual discount rate is 6%, and the time period is 5 years. Calculate (1.06)^5 ≈ 1.33823, then the present value is 1,000 / 1.33823 ≈ 747.26. So the amount needed today to grow to 1,000 in five years at 6% compounded annually is about 747.26. The other options reflect using a different discount factor or treating the rate in a non-compounded way, which isn’t consistent with annual compounding.