Captstone Checkpoint-Present Value, Future Value, and Annuity Due

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Capstone CheckPoint: Present Value, Future Value, and Annuity Due

Complete Problems 3, 4, and 5 on pp. 278 and 279 of Foundations of Financial Management

Due: Friday February 8, 2013

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 x .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.

$5,000 x .794 = $3,970

4. If you invest $9,000 today, how much will you have:

(I will be using Appendix A)

a. In 2 years at 9 percent?

$9,000 x 1.188 = $10,692

b. In 7 years at 12 percent?

$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%
$9,000 x 29.457 = $265,113

5. Your Uncle offers you a choice of $30,000 in 50 years or $95 today. If the money is discounted at 12 percent, which should you choose?

(I will be using Appendix B)

PV=FV×PVIf

Present value would be $30,000 x .003 = $90

I would choose $95 since in 50 years the present value of the annuity due will only be worth $90

References:

Block, B.B., Hirt, G.A., & Danielsen, B.R. (2009). Foundations of…...

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