Answered: How much (in $) should the company…

Business

Finance

How much (in $) should the company invest now to have sufficient funds to build the homes in the future?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 16P

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

A real estate development company is planning to build five homes, each costing $155,000, in
2
1
2
years.
The Galaxy Bank pays 6% interest compounded semiannually. How much (in $) should the company invest now to have sufficient funds to build the homes in the future?

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