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Time Value of Money: Compounding and Discounting

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1) How much will you have in 5 years if you put \$10,000 into an account that earns 6% annually?

2) What is the present value of \$100,000 you will receive in 10 years if you are using an 8% discount rate?

3) How much will you have in 10 years if you invest \$1,000 a year starting today at an interest rate of 7%?

4) What is the present value of \$2,000 received at the end of each year for the next 15 years at a discount rate of 7%?

5) How are the processes of discounting and compounding related? Explain.

Solution Preview

1) How much will you have in 5 years if you put \$10,000 into an account that earns 6% annually?

2) What is the present value of \$100,000 you will receive in 10 years if you are using an 8% discount rate?

3) How much will you have in 10 years if you invest \$1,000 a year starting today at an interest rate of 7%?

4) What is the present value of \$2,000 received at the end of each year for the next 15 years at a discount rate of 7%?

5) How are the processes of discounting and compounding related? Explain.

Note: the abbreviations have the following meanings

PVIF= Present Value Interest Factor
FVIF= Future Value Interest Factor
Ordinary Annuity
PVIFA= Present Value Interest Factor for an Annuity
FVIFA= Future Value Interest Factor for an Annuity
Annuity due
PVIFA (Annuity due)= Present Value Interest ...

Solution Summary

The present values and future values are calculated, given discount rates and interest rates.

\$2.19