Question

1. What is the present value of $10,000 to be received 10 years from today, assuming a 6 percent annual interest (discount) rate?  

2. 2. If you deposit $3,000 in a bank account that pays 4 percent annual interest, what would your account balance equal after 9 years?  

   3. To settle a wrongful death case, a judge ordered the maker of a defective product to pay the spouse of the deceased person $100,000 today, $150,000 four years from today, and $250,000 eight years from today. What is the present value of the judgement against the product manufacturer, assuming a 6 percent annual interest rate? (note--the payment “today” is part of the judgement)

   4. Amy started a retirement savings plan. At the end of each year, for 20 years, Amy deposited $5,000 to her savings plan. If the retirement savings plan earns 5 percent, compounded annually, what will her account balance equal after Amy makes the last of her 20 annual savings deposits?  

   5. Clark would like to purchase a new car. To help fund the purchase, he will borrow $18,000 from his credit union. Clark agreed to make monthly payments for 4 years (48 months) to repay the loan. The credit union will charge 6 percent interest, compounded monthly (0.50 percent per month). What is Clark’s monthly car loan payment?  

   6. Dryden Company borrowed money by issuing some 10-year bonds. When the bonds mature after ten years, Dryden will have to pay the maturity value, $10 million, to the bondholders. Dryden Company would like to pre-fund the $10 million by setting aside an equal annual amount at the end of each year for 10 years. If the funds set aside to pre-fund the $10 million can earn 4 percent annual interest, how much must Dryden Company set aside in an equal amount at the end of each year so that after 10 years it will have the money needed to pay-off the bondholders?  

   7. Juan was injured by a vehicle driven by a Rapid Transit delivery driver. To settle the claim for Juan’s injuries, Rapid Transit agreed to pay Juan eight annual payments of $25,000 with the first of these payments four years from today. Assuming a 5 percent annual interest rate, what is the present value of Juan’s settlement?   

Answer 1

Answer to Question 1.
Future Value = $10,000
Time (n ) = 10 years
Rate (r ) = 6%
Present Value = ??

Present Value = Future Value / (1 + r) ^ n
Present Value = $10,000 / (1 + 0.06)^ 10
Present Value = $10,000 / 1.06^ 10
Present Value = $10,000 / 1.7908
Present Value = $5,584.10

Answer to Question 2.
Amount deposited (Present Value) = $3,000
Time (n ) = 9 years
Rate (r ) = 4%
Value after 9 years (Future Value) = ??

Future Value = Present Value * (1 + r) ^ n
Future Value = $3,000 * (1 + 0.04)^ 9
Future Value = $3,000 * 1.04^ 9
Future Value = $3,000 * 1.4233
Future Value = $4,269.90