Problem 1: You will receive $5,000 three years from now. The discount rate is 8 percent.
a. What is the value of your investment two years from now? Multiply $5,000 _ .926 (one year’s discount rate at 8 percent).
b. What is the value of your investment one year from now? Multiply your answer to part a by .926 (one year’s discount rate at 8 percent).
c. What is the value of your investment today? Multiply your answer to part b by .926 (one year’s discount rate at 8 percent).
d. Confirm that your answer to part c is correct by going to Appendix B (present value of $1) for n _ 3 and i _ 8 percent. Multiply this tabular value by $5,000 and compare your answer to part c. There may be a slight difference due to rounding.
Problem 2: If you invest $9,000 today, how much will you have:
a. In 2 years at 9 percent?
b. In 7 years at 12 percent
c. In 25 years at 14 percent?
d. In 25 years at 14 percent (compounded semiannually)?
Problem 3: Your uncle offers you a choice of $30,000 in 50 years or $95 today. If money is discounted at 12 percent, which should you choose?