Question

You invest $200 today, $300 next year, and $400 three years from now. How much money will you have 15 years from now if earning 10% interest?

Purchasing power of money depends upon the rate of interest and time period. true or false

For the purpose of analysis using PW method, we still need to renew the shorter life project. True or False

Answer 1

Q1

We use formula F= P *(1+i)^t

i = 10%

Present value of investment = 200 + 300/1.1 + 400/1.1³

= 773.25

Future value after 15 years

= 773.25 * (1+0.1)^15

= 773.25 * 1.1^15

= 3230.07

Q2

True, Purchasing power of money in future invest at interest rate i for time t is given by P*(1+i)^t. we see its dependent on the interest rate and time.

Q3

True. PW analysis is always carried for an equal time period when comparing two alternatives. If the useful lives of alternatives are not equal then analysis carried out for the least common multiple of the useful lives of the alternatives.