Question

You have just received a windfall from an investment you made in a​ friend's business. She will be paying you

$ 18,811 at the end of this​ year, $37,622 at the end of next​ year, and $56,433

at the end of the year after that​ (three years from​ today). The interest rate is 8.8% per year.

a. What is the present value of your​ windfall?

b. What is the future value of your windfall in three years​ (on the date of the last​ payment)?

Answer 1

Answer :

a. Present Value = Year 1 Return / (1+interest rate)^1 + Yaer 2 Return / (1+interest rate)^2 + Year 3 Return / (1+interest rate)^3

Present Value = 18811 / 1.088 + 37622 / 1.088^2 + 56433 / 1.088^3

Present Value = 17289.52 + 31782.21 + 43817.38

Present Value = 92889.11

b. Future Value = Year 1 Return * (1+interest rate)^2 + Year 2 Return * (1+interest rate)^1 + Year 3 Return

Future Value = 18811 * 1.088^2 + 37622 * 1.088^1 + 56433

Future Value = 22267.41 + 40932.74 + 56433

Future Value = 119633.15