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Finding present and future values

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1. 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 by .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.

2. 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?

3. 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

There are three problems. Solutions to these problems explain methodology to find present and future values of a single cash flow.

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Solution:

1. 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?
Future Value at the end of 2nd year=FV(3 year)* one year's discount factor
=5000*0.926=$4630

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).

Future Value at the ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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