Question

an investor has a series of four 50,000 payments expected to be realized at the end of each evaluation years two, three, four, and five. calculate the present value at time zero and the corresponding future values at the end of year 7

Answer 1

Answer:

Assume the interest rate applied is 6%.

* The present value at time zero: $173,255;

* Corresponding future values at the end of year 7: $245,766.

Explanation:

* The present value at time zero:

Apply the formula for calculating present value of the annuity to come up with the present value of the annuity as at the end of Year 1:

(50,000/6%) * [ 1 - 1.06^(-4) ] = $173,255

Present value at time zero by discounting one more period  = $173,255/1.06 = $163,448.

* Corresponding future values at the end of year 7:

Apply the formula for calculating future value of the annuity to come up with the future value of the annuity as at the end of Year 5:

(50,000/6%) *  (1.06^4 -1) = $218,731

Future value at the end of Year 7 by compounding two more period  = $218,731 * 1.06^2 = $245,766.