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FIN200 Week 9 Capstone CheckPoint

FIN200 Week 9 Capstone CheckPoint - c In 25 years at 14...

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FIN200 Week 9 Capstone CheckPoint: Present Value, Future Value, and Annuity Due Complete Problems 3, 4, & 5 on pp. 278 & 279 of Foundations of Financial Management . 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). 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. 4. 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?
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Unformatted text preview: c. In 25 years at 14 percent? d. In 25 years at 14 percent (compounded semiannually)? 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? SOLUTION FROM ANSWER KEY (3) (a) PV (2 years from now) = FV * 0.926 = 5000 * 0.926 = $4630 (b) PV (1 year from now) = FV * 0.926 = 4630 * 0.926 = $4287.38 (c) PV (Today) = 4287.38 * 0.926 = $3970.11 (d) Verification: 5000 * 0.794 = $3970, which is the same as that got in (c) (4) A = P(1 + r/100n)^(nt) (a) A = 9000(1 + 9/100)^2 = $10692.90 (b) A = 9000(1 + 12/100)^7 = $19896.13 (c) A = 9000(1 + 14/100)^25 = $238157.24 (d) A = 9000(1 + 14/200)^50 = $265113.23 (5) We calculate the PV first. PV = FV/(1 + r/100)^t = 30000/(1 + 12/100)^50 = $103.81 Since $103.81 > $95, we must choose $30000 50 years from now ....
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