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Finance: Discounting.

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3. You will receive $5,000 three years from now. The discount rate is 8 percent.

a. What is the value of your investment two years from now? Multiply
$5,000 _ .926 (one year's discount rate at 8 percent).

b. What is the value of your investment one year from now? Multiply your
answer to part a by .926 (one year's discount rate at 8 percent).

c. What is the value of your investment today? Multiply your answer to part b
by .926 (one year's discount rate at 8 percent).

d. Confirm that your answer to part c is correct by going to Appendix B (present
value of $1) for n _ 3 and i _ 8 percent. Multiply this tabular value by
$5,000 and compare your answer to part c. There may be a slight difference
due to rounding.

4. If you invest $9,000 today, how much will you have:

a. In 2 years at 9 percent?

b. In 7 years at 12 percent
c. In 25 years at 14 percent?

d. In 25 years at 14 percent (compounded semiannually)?

5. Your uncle offers you a choice of $30,000 in 50 years or $95 today. If money is
discounted at 12 percent, which should you choose?

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Solution Summary

The problem deals with cash discounting in finance.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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