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FinanceQ&A LibraryFind the following values for a lump sum assuming annual compounding:The future value of $500 invested at 8 percent for one yearThe future value of $500 invested at 8 percent for five yearsThe 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.Question

Asked Jun 9, 2019

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- 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.

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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