Question

You have just received a windfall from an investment you made in a​ friend's business. She will be paying you $ 15 comma 555 at the end of this​ year, $ 31 comma 110 at the end of next​ year, and $ 46 comma 665 at the end of the year after that​ (three years from​ today). The interest rate is 6.7 % 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:

Present value = $75,379.47

Future value is $91,567.97

Explanation:

a) Present value of cash flow is calculated as:

$Present\ value = \frac{(15,555}{1.067} + \frac{(31,110}{(1.067)^2}) + \frac{(46,665}{(1.067)^3})$

Present value = $14578.25 + $27,325.69 + $33475.53

Present value = $75,379.47

b) Future value of windfall is calculated as

$Future\ value  = present\ value \times (1-r)^n$

$Future\ value  = 75379 \times (1+ 0.067)^3$

Future value is $91,567.97