Time Value of Money answers.pdf - Time Value of Money Practice PV = FV(1 r =(1 =(1 1 You will receive \$1000 in one year what is that worth today if the

Time Value of Money answers.pdf - Time Value of Money...

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Time Value of Money Practice 𝐹𝐹𝐹𝐹 = 𝑃𝑃𝐹𝐹 𝑥𝑥 (1 + 𝑟𝑟 ) 𝑡𝑡 𝐹𝐹𝐹𝐹 = 𝑃𝑃𝐹𝐹 𝑥𝑥 (1 + 𝑟𝑟 𝑚𝑚 ) 𝑚𝑚 𝑥𝑥 𝑡𝑡 1) You will receive \$1000 in one year, what is that worth today if the discount rate is 1%? 4%? 10%? How would you describe the pattern of these results? 990, 961, 909. As the discount rate increases, the present value decreases. 2) In five years you will receive \$1000, how much is that worth today if the discount rate is 2%? What if you receive \$2000? \$5000? How would you describe the pattern of these results? 905, 1811, 4528. As the future amount increases, the present value increases. 3) Suppose you are saving for a vacation in three years. You estimate that it will cost \$5000. How much do you need to deposit today if the interest rate is 3%? 5%? 8%? How would you describe the pattern of these results? 4575, 4319, 3969. As the interest rate increases, the present value decreases, this implies that you need to save less today with higher interest rates. 4) Suppose you are saving for a vacation that will cost \$3000. How much do you need to deposit today if the interest rate is 7% and the vacation is next year? 3 years? 6 years?

• Spring '19
• Jon Chait

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