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?
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Solution Summary
The solution provides detailed calculations and explanations for the problem.
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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 = ...
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