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Present Value, future value calculations: lump sum deposits, discounted market price

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Present value for 1$:

1. You want to begin a college fund for your newborn child; you hope to accumulate $ 30,000 by 18 years from now. If a current investment opportunity yields 7 percent, how much must you invest in a lump sum to realize the $30,000 when needed?

2. You hope to retire in 25 years and want to deposit a single lump sum that will grow to $250,000 at that time. If you can now invest at 8 percent, how much must you invest to realize the $250,000 when needed?

3. You have the choice of receiving a down payment from someone who wants to purchase your rental property as $15,000 today or as a personal note for $25,000 received in 6 years. If you could expect to earn 8 percent on such funds, which is the better choice?

4. You own a $1,000 bond paying 8 percent annually until its maturity in 5 years. You need to sell the bond now even though the market rate of interest on similar bonds has increased to 10 percent. What discounted market price for the bond will allow the new buyer to earn a yield of 10 percent?

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Solution Summary

The first three problems are answered in a single sentence. The fourth problem is divided into two parts and has a full paragraph of explanation for the correct response.

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1. the present value factor is 0.296, thus , the solution is $30,000 x.296 or $8880

2. the present value of $250,000 received 25 years from now is $36,500 if the interest rate is 8 ...

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