   Chapter 5, Problem 10P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PRESENT AND FUTURE VALUES FOR DIFFERENT INTEREST RATES Find the following values. Compounding/discounting occurs annually. a. An initial S500 compounded for 10 years at 6% b. An initial $500 compounded for 10 years at 12% c. The present value of S500 due in 10 years at 6% d. The present value of$1,552.90 due in 10 years at 12% and at 6% e. Define present value and illustrate it using a time line with data from Part d. How are present values affected by interest rates?

a.

Summary Introduction

To determine: The present value and the future value.

Present Value: The present value refers to that value, which is the current value and by which the future value of the annuity is determined. The calculation of future value depends on the present value, which is calculated at a discounted rate.

Future Value: The future value means that value of the investment, which will be realized in the future. With the help of the calculation of future value, an analysis of the amount to be invested can be made. This is very useful for the financial users and investors.

Explanation

Solution:

Given,

The cash flow is \$500.

The rate of interest is 6% annually.

The time period is 10 year.

Calculate the future value.

The formula to calculate the future value is,

FV=PV(1+I)N

Where,

• FV is the future value,
• PV is the present value,
• I is the interest rate and
• N is the time period

b.

Summary Introduction

To determine: The present value and the future value.

c.

Summary Introduction

To determine: The present value and the future value.

d.

Summary Introduction

To determine: The present value and the future value.

e.

Summary Introduction

To determine: The present value and the future value.

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