Answer:
a.
Future Value in One Year = $1,070.00
Future Value in Two Years = $1,144.90
b.
Present Value of amount received in 1 year = $934.58
Present Value of amount received in 2 years = $873.44
The present value of the gift is <u>less/lower</u> if you get engaged in two years than it is if you get engaged in one year.
Explanation:
These can be done as follows:
Present Value Value in One Year Value in Two Years
Date Received (Dollars) (Dollars) (Dollars)
Today 1,000.00 1,070.00 1,144.90
In 1 year 934.58 1,000.00
In 2 years 873.44 1,000.00
a. Complete the first row of the table by determining the value of the gift in one and two years if you become engaged today.
To do this, we use future value (FV) formula as follows:
Future Value = A * (1 + r)^n ........................................ (1)
Where;
A = Amount received to day = $1,000.00
r = interest rate = 7%, or 0.07
n = number of years
Using equation (1), we therefore have:
Future Value in One Year = 1,000.00 * (1 + 0.07)^1 = $1,070.00
Future Value in Two Years = 1,000.00 * (1 + 0.07)^2 = $1,144.90
b. Complete the first column of the table by computing the present value of the gift if you get engaged in one year or two years.
To do this, we use present value (PV) formula as follows:
Present Value = A / (1 + r)^n ........................................ (2)
Where;
A = Amount received in specified year = $1,000.00
r = interest rate = 7%, or 0.07
n = number of years
Using equation (2), we therefore have:
Present Value of amount received in 1 year = 1,000.00 / (1 + 0.07)^1 = $934.58
Present Value of amount received in 2 years = 1,000.00 / (1 + 0.07)^2 = $873.44
Since $873.44 is less/lower than $934.58, we therefore have:
The present value of the gift is <u>less/lower</u> if you get engaged in two years than it is if you get engaged in one year.
