Question

Suppose a relative has promised to give you $1,000 as a wedding gift the day you get engaged. Assuming a constant interest rate of 5%, consider the present and future values of this gift, depending on when you become engaged. Complete the first row of the table by determining the value of the gift in one and two years if you become engaged today. Present Value Value in One Year Value in Two YearsDate Received (Dollars) (Dollars) (Dollars)Today 1,000.00 ? ?In 1 year ? 1,000.00 In 2 years ? 1,000.00Complete the first column of the table by computing the present value of the gift if you get engaged in one year or two years.The present value of the gift is _________ if you get engaged in two years than it is if you get engaged in one year.

Answer 1

Answer:

Date Received       Present Value      Value in 1 Year    Value In 2 Years

today                       $1,000                  $1,050                 $1,102.50          

in 1 year                   $952.38               $1,000                 $1,050

in 2 years                $907.03               $952.38               $1,000      

The present value of the gift is LOWER (BY $45.35) if you get engaged in two years than it is if you get engaged in one year.

Explanation:

to determine future value:

future value = present value x (1 + interest rate)ⁿ

to determine present value:

present value = future value / (1 + interest rate)ⁿ