Asked Jun 9, 2019
  1. Find the following values for a lump sum assuming annual compounding:
    • The future value of $500 invested at 8 percent for one year
    • The future value of $500 invested at 8 percent for five years
    • The present value of $500 to be received in one year when the opportunity cost rate is 8 percent.
    • The present value of $500 to be received in five years when the opportunity cost rate is 8   percent.

Expert Answer

Step 1

Before we get into the solution, let's understand two reciprocal concepts:

If present value (PV) is known then we can calculate the future value (FV) making use of the following equation:

FV = PV x (1 + i)n

where i = interest rate / opportunity cost per period and

n = number of periods

We can invert the same equation to obtain PV if FV is known:

PV = FV x (1 + i)-n

Step 2

We are now ready to solve the questions (Please do round off the answers as per your requirement)

The future value of $500 invested at 8 percent for one year = ?

Here, PV = $ 500, i = 8%, n = 1

Hence, FV = 500 x (1 + 8%)1 = $ 540

Step 3

The future value of $500 invested at 8 percent for five years

PV = $ 500, i =...

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