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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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This note was uploaded on 01/04/2011 for the course FIN 200 taught by Professor Williams during the Spring '08 term at University of Phoenix.
 Spring '08
 WILLIAMS
 Finance, Annuity, Future Value

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