Time value of money
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1-An investment will pay $ 100 at the end of each of the next 3 years, $ 200 at the end of Year 4, $ 300 at the end of Year 5, and $ 500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is its present value? Its future value?
2- You want to buy a car, and a local bank will lend you $ 20,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 12% with interest paid monthly. What will be the monthly loan payment? What will be the loan's EAR?
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Solution Summary
The solution explains some questions relating to time value of money.
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1. The present value is calculated by discounting the cash flows. The formula for present value is
PV = FV/(1+rate)^n
where FV is the future value, rate is the discounting rate and n is the time period when the cash flow occurs
The PV cash flows is
PV = 100/1.06 + 100/1.06^2 + 100/1.06^3 + ...
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