Question

1. Obtain the future value of 120 million yen two years from now. The discount rate...

1. Obtain the future value of 120 million yen two years from now. The discount rate is 7%. Use calculator.

2. Assume you obtain 500 yen each year forever. Obtain the present value of this stream of cash flow. The discount rate is 10%.

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Answer #1

1.

Present value = 120 million yen

Time period (n) = 2 years

Discount rate (r) = 7%

Future value = ?

Future value = Present value x (1 + r)n

= 120 x (1 + 0.07)2

= 120 x (1.07)2

= 120 x 1.1449

= 137.388 million yen

2.

Discount rate (r) = 10%

Annual cash flow = 500 yen

Present value of perpetuity = Annual cash flow/r

= 500/0.10

= 5,000 million yen

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