need to learn how to solve using nominal rate, pure rate, inflation rate and ris

Question

need to learn how to solve using nominal rate, pure rate, inflation rate and risk premium

3 (Present value and time) An investment promises to return $20,000 in 1 year while a second investment promises to return $186,350 in 30 years. Investors re- quire an 8% rate of return from both investments. a. What is the present value of each investment? b. What happens to the present value of each invest- ment if the required rate of return rises to 10%? c What happens to the present value of each invest- ment if the required rate of return falls to 6%? d. Why do the present values change this way?

Explanation / Answer

3a)final value=present value*(!+r)^n
present value=20000/(1+8%)
=18518.82
present value=186350/1.08^30
=18518.97

b)if it is 10% then
present value=20000/(1+10%)
=18181.82
present value=186350/1.1^30
=10679.45

c)if it is 6% then
present value=20000/(1+6%)
=18867.92
present value=186350/1.06^30
=32445.42

d)Since the interest chnages the present value chnages

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