Question

Clair Dunphy will receive a confirmed future payoff from an investment that she made in a business in Ireland. It will pay Clair €10,000 one year from today, €20,000 two years from today, and €30,000 three years from today. The interest rate is 5% per year.

A. What is today’s present value of Clair’s investment payoffs?

B. What is the future value of Clair’s investment payoffs exactly three years from today (on date of last payment)?

Answer 1

A) Present value = Cash flow / (1+r)^n

= 10,000/(1+0.05)^1 + 20,000/(1+0.05)^2 + 30,000/(1+0.05)^3

= 10,000 / (1.05) + 20,000 /(1.05)^2 + 30,000/(1.05)^3

= 10,000 / 1.05 + 20,000 / 1.1025 + 30,000 / 1.1576

= 9,523.81 + 18,140.59 + 25,915.69

= $53,580.09

B) Future value at time 3 = Cash flow (1+r)^n

= 10,000 (1+0.05)^2 + 20,000(1+0.05)^1 + 30,000

= 10,000 (1.05)^2 + 20,000 (1.05) + 30,000

= 10,000 (1.1025) + 21,000 + 30,000

= 11,025 + 21,000 + 30,000

= $62,025