Using the present value time-value formulas to calculate the future cost of goods and services is one way to produce more realistic prices. In this Application, you practice using a time-value formula to determine future prices.rnThe following simple, present-value formula shows the effect of discounting on the cost of a public policy. In the formula, the discount rate will be set at:rn(1 + r)time where:rn1= a constantrnr = a selected interest raterntime = a period of time, usually a yearrnThe formula is:rnCost or Benefitrn(1+r)timernThe calculation occurs like this example of $1,000 over 2 years discounted at 10%:rn$1,000rn(1+10%)2rn= rn$1,000rn(1.1)2rn= rn$1,000rn1.21rn= $826.44rnConsider the following scenario:rnA city wants to open a recycling center aimed at reducing waste. The total benefits of the program are valued at $1,000,000. Three different discount rates are estimated at 5%, 6%, and 7%. The time period for receiving the benefits of the program is two years.rnScenario 1 tasks:rnCalculate the present value at each interest rate.rnNote and discuss what happens to the present value at each interest rate.
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