Question

You have just received a windfall from an investment you made in a friend's business. He will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at the end of the year after that (three years from today). The interest rate is 3.5% per year. a.What is the present value of your windfall? b.What is the future value of your windfall in three years (on the date of the last payment)?

Answer 1

Answer:

a. $55,390.29

b. $61,412.20

Step-by-step explanation:

a. To find the present value of your windfall, each value must be brought back to the present year at a rate of 3.5% per year. The present value is:

$PV = \frac{10,000}{1.035}+\frac{20,000}{1.035^2}+\frac{30,000}{1.035^3}\\PV = \ 55,390.29$

The present value of your windfall is $55,390.29.

b. To find the future value of your windfall at the date of the last payment, simply compound the preset value amount obtained on the previous item for three years at a rate of 3.5%:

$FV =55,390.29*(1.035)^3\\FV=\ 61,412.20$

The future value of your windfall is $61,412.20.