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# You will receive \$5,000 three years from now. The discount r

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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.

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)?

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?

#### Solution Preview

The key formula to use in these problem:
FV = PV(1+r)^n
where FV = future value
PV = present value
r = interest rate
n = years

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?
FV = 5,000; rate = 8%; N = 1 years; PV =?
PV = FV x PVIF8%, 1 year
= 5,000 x 0.926
= \$4,630

b. What is the value of your investment one year from now? Multiply your
answer to part a by .926
PV = ...

#### Solution Summary

The solution provides detailed calculations and explanations for the problem.

\$2.19