Answer:
Explanation:
These are time value of money questions;
a:Compute the future value in year 9 of a $3,900 deposit in year 1 and another $3,400 deposit at the end of year 5 using a 9 percent interest rate.
Find FV of each and sum them up. The formula is as follows;
FV = PV(1+r)^n
Find future value (FV) of 3900 at year 9, starting from year 1; there will be 8 years of investment.
FV = 3900(1.09^8)
FV = 7770.994
Next find the future value of (FV) of 3400;
FV = 3400(1.09^4)
FV = 4799.377
Total FV = 7770.994 + 799.377 = 12,570.37
b. What is the future value of a $970 annuity payment over four years if interest rates are 8 percent?
It's important to understand that the $970 yearly annuity is a recurring payment hence the PMT.
Using a financial calculator, input the following;
Recurring payment; PMT = -970
Duration of payment = 4 years
One time present cashflow; PV = 0
Interest rate; I = 8%
then compute the future value; CPT FV = 4370.93
c.Compute the present value of a $3,200 deposit in year 1 and another $2,700 deposit at the end of year 3 if interest rates are 10 percent.
This is the opposite of future value. PV is calculated using discounting process. Therefore, find the PV of each CF and sum them up. The formula is as follows;
PV = FV/ (1+r)^n
PV of 3200;
PV = 3200/(1.10^1)
PV = 2909.0909
Next, calculate present value of 2700;
PV of 2700;
PV = 2700/(1.10^3)
PV = 2028.5500
Now sum up the two PVs;
Total PV = 2909.0909 + 2028.5500 = 4937.64
