   Chapter 5, Problem 24P 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 VALUE FOR VARIOUS DISCOUNTING PERIODS Find the present value of $500 due in the future under each of these conditions: a. 12% nominal rate, semiannual compounding, discounted back 5 years b. 12% nominal rate, quarterly compounding, discounted back 5 years c. 12% nominal rate, monthly compounding, discounted back 1 year 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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