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Concept of Present Value: Calculate FV, PV, annuity problems

Explain why the concept of present value is so important for corporate finance and is often the very first topic taught in any finance class.

2. Calculate the future value of the following:
a. $500 if invested for five years at a 4% interest rate
b. $150 if invested for three years at a 9% interest rate
c. $9100 if invested for seven years at an 3% interest rate
d. $1000 if invested for ten years with a 0.5% interest rate

3. Calculate the present value of the following:
a. $7700 to be received three years from now with a 5% Interest rate
b. $1500 to be received five years from now with a 7% interest rate
c. $7200 to received two years from now with a 11% interest rate
d. $680,000 to be received eight years from now with a 9% interest rate.

4. Suppose you are to receive a stream of annual payments (also called an "annuity") of $3000 every year for three years starting this year. The interest rate is 3%. What is the present value of these three payments?

5. Suppose you are to receive a payment of $5000 every year for three years. You are depositing these payments in a bank account that pays 2% interest. Given these three payments and this interest rate, how much will be in your bank account in three years?

Solution Preview

Also see attached file.

Explain why the concept of present value is so important for corporate finance and is often the very first topic taught in any finance class.

We understand that money has value, and the value derived from the use of money over time as a result of investment and reinvestment will result differently due to the interest. So, something that is worth $1 today will be worth more in the future if invested or deposited in the bank.
In the real world, we always have the choice to receive the lump sum of money now or receive in a series of equal payments. Obviously, we would want to know which alternative is the better choice. Therefore, we need to calculate the present value of each alternative by using the same specified interest rate and compare which one will give the ...

Solution Summary

This solution is comprised of a detailed explanation to explain why the concept of present value is so important for corporate finance and is often the very first topic taught in any finance class.

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