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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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PRESENT VALUE FOR VARIOUS DISCOUNTING PERIODS Find the present value of $500 due in the future under each of these conditions:

  1. a. 12% nominal rate, semiannual compounding, discounted back 5 years
  2. b. 12% nominal rate, quarterly compounding, discounted back 5 years
  3. c. 12% nominal rate, monthly compounding, discounted back 1 year
  4. d. Why do the differences in the PVs occur?

a.

Summary Introduction

To compute: Present value of $500 at 12% nominal rate semiannual compounding, discounted back 5 years.

Present Value of Cash Flow:

It is also called as discounted value; it defines that amount of money that is invested at a given rate of interest will increases to the amount of future cash flow at that particular time in the future.

Explanation

Formula to calculate future value is,

FV=PV(1+I)N×T (I)

Here,

  • FV is the future value.
  • PV is the present value.
  • I is the interest rate.
  • N is the number of periods.
  • T is for defined time

Substitute $500 for FV, 12% for I, 5 years for N and 2 for T in equation (I).

$500=PV(1+0

b.

Summary Introduction

To compute: Present value of $500 at 12% nominal rate, quarterly compounding, and discounted back 5years.

Present Value of Cash Flow:

It is also called as discounted value; it defines that amount of money thatis invested at a given rate of interest will increases to the amount of future cash flow at that particular time in the future.

c.

Summary Introduction

To compute: Present value of $500 at 12% nominal rate , monthly compounding, discounted back 1year.

Present Value of Cash Flow:

It is also called as discounted value; it defines that amount of money thatis invested at a given rate of interest will increases to the amount of future cash flow at that particular time in the future.

d.

Summary Introduction

To explain: Reason of difference in present value of part a andb.

Present Value of Cash Flow:

It is also called as discounted value; it defines that amount of money that is invested at a given rate of interest will increases to the amount of future cash flow at that particular time in the future.

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