Question

An investment will pay $200 at the end of each of the next 3 years, $300 at the end of Year 4, $500 at the end of Year 5, and $800 at the end of Year 6. If other investments of equal risk earn 5% annually, what is its present value? Round your answer to the nearest cent. $ 2255.30 What is its future value? Round your answer to the nearest cent. $ 3022.32

Answer 1

Answer:

Present value = $1,780.20

Future value = $2,385.64

Explanation:

Years     Annual cash flows   Discount factor @5%       Present value

1              $200.00                  0.9523809524             $190.48

2             $200.00                  0.9070294785             $181.41

3             $200.00                  0.8638375985              $172.77

4             $300.00                  0.8227024748              $246.81

5             $500.00                  0.7835261665               $391.76

6             $800.00                  0.7462153966               $596.97

Present value                                                         $1,780.20

Now the future value is

Future value = Present value × (1 + interest rate)^number of years

= $1,780.20 × (1 + 0.05)^6

= $1,780.20 × 1.3400956406

= $2,385.64