Read these two statements: a. John invests $1,000 today at 6%. How much will Joh
ID: 2499926 • Letter: R
Question
Read these two statements: a. John invests $1,000 today at 6%. How much will John's investment grow to in five years b. Mary is looking at an investment that will pay her $4,000 in two years. How much should Mary pay for this investment if she demands a rate of return of 6%? Which one of these is a future value problem Which one is a present value problem Referring to Question 1, answer statement a; then answer statement b Bill invests $1,000 today at 8% interest. We want to calculate the amount this investment will grow to in 20 years. Can you create formula that will compute this future value Fill in the following table:Explanation / Answer
1) The first statement relating to John is a future value problem and the second sentence relating to Mary is a present value problem.
2) a) If John invests $1000 today at 6%, his investment will grow to $ 1,338.23 in five years.
Worksheet: Furture Value at the end of the 5th year FVn = 1000(1.06)5 = $1338.23
b) Since Mary requires $4000 after two years for investment to be made today, her required rate of return being 6%
she should pay $3559.99 for the investment.
We need the PV of $4000 discounted @ 6% = 4000/(1.06)2 = $3559.99
3) The formula for finding out the future value for Bill after 20 years at 8% will be
FV20 = 1000(1+0.08)20 = $ 4,660.96
4) Future of $1
5) a) PV = 10000/1.083 =$ 7938.32
Proof: The PV will be proved correct if its compound value at the end of three years @ 8% = $10000
7938.32 invested at 8% will be 7938.32 * 1.08 = 8573.39 at the end of the first year
reinvested at 8% for one more year will be 8573.39*1.08 = 9259.26 at the end of the second year.
reinvested for the third year will be 9259.26*1.08 = 10,000.
b) PV = 5000/1.083 = $3969.16
Proof: As above, year end values will be:
3969.16 * 1.08 = 4286.69 at the end of the 1st year
4286.69*1.08=4629.63 at the end of the 2nd year
4629.63*1.08 =5000 at the end of the 3rd year
Year/Percentage 4% 5% 7% 9% 1 1.0400 1.0500 1.0700 1.0900 2 1.0816 1.1025 1.1449 1.1881 3 1.1249 1.1576 1.2250 1.2950 4 1.1699 1.2155 1.3108 1.4116
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