Week 9 Checkpoint Present Value, Future Value & Annuity Due

Week 9 Checkpoint Present Value, Future Value & Annuity Due

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3. 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). 5,000 x .926 = 4,630 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). 4,630 x .926 = 4,287.38 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). 4,287.38 x .926 = 3,970.11 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. 5000 x .794 = 3,970 4. If you invest $9,000 today, how much will you have: a. In 2 years at 9 percent? 9,000 x 1.188 = 10,692 b. In 7 years at 12 percent?
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Unformatted text preview: 9,000 x 2.211 = 19,899 c. In 25 years at 14 percent? 9,000 x 26.462 = 238,158 d. In 25 years at 14 percent (compounded semiannually)? n = 25 x 2 = 50 i = 14%/2 = 7% FV = PV x FVif 9,000 x 29.457 = 265,113 5. 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? PV = FV x PVif 30,000 x 0.003 = 90 FV = PV x FVif 95 x 289.00 = 27,455 Based on the present value of receiving $30,000 in 50 years and the future value of investing $95.00 that is received today I would opt to take the $30,000 in 50 years. Because in the long run I end up with $2,545 more than if I invested the $95 on my own at the same interest rate for 50 years. Some may opt to take the $95 today just because they get $5 more today never thinking that maybe that $95.00 today will not be worth $30,000, 50 years from today....
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This note was uploaded on 11/09/2010 for the course FIN 200 FIN 200 taught by Professor Smith during the Spring '10 term at University of Phoenix.

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Week 9 Checkpoint Present Value, Future Value & Annuity Due

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