Question

You have just received a windfall from an investment you made in a​ friend's business. She will be paying you $49,124 at the end of this​ year, $98,248 at the end of next​ year, and $147,372 at the end of the year after that​ (three years from​ today). The interest rate is 9.5% 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

Present value = Cash flow / (1+interest rate)^time

Period	0	1	2	3
Cash Flow		$49,124	$98,248	$147,372
Interest rate		9.5%	9.5%	9.5%
Present value calculation		=49,124 / (1+9.5)^1	=98,248/ (1+9.5)^2	=147,372/ (1+9.5)^3
Present value		$44,862	$81,940	$112,246
Total present value		$239,048

Future value = Cash flow * (1+interest rate)^time

Period	0	1	2	3
Cash Flow		$49,124	$98,248	$147,372
Interest rate		9.5%	9.5%	9.5%
Future value calculation		=49,124 x (1+9.5)^2	=98,248 x (1+9.5)^1	=147,372
Future value		$58,901	$107,581	$147372
Total Future value		$313,853