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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PRESENT AND FUTURE VALUES FOR DIFFERENT INTEREST RATES Find the following values. Compounding/discounting occurs annually.

  1. a. An initial $200 compounded for 10 years at 4%
  2. b. An initial $200 compounded for 10 years at 8%
  3. c. The present value of $200 due in 10 years at 4%
  4. d. The present value of $1,870 due in 10 years at 8% and at 4%
  5. 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 computed for future amounts based on the 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.

Explanation

Given,

The cash flow is $200,

The rate of interest is 4% annually.

The time period is 10 year.

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.

Substitute $200 for PV, 4% for I and 10 for N in the above formula

b.

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 computed for future amounts based on the 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.

c.

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 computed for future amounts based on the 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.

d.

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 computed for future amounts based on the 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.

e.

Summary Introduction

To define: The present value with a time line and the effect of interest rates on present value.

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