Question

Present and future values for different periods

Find the following values using the equations and then a financial calculator. Compounding/discounting occurs annually. Do not round intermediate calculations. Round your answers to the nearest cent.

1. An initial $500 compounded for 1 year at 7%.

   $  

2. An initial $500 compounded for 2 years at 7%.

   $  

3. The present value of $500 due in 1 year at a discount rate of 7%.

   $  

4. The present value of $500 due in 2 years at a discount rate of 7%.

   $  

Answer 1

a.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

A=$500*(1.07)

=$535

b.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

A=$500*(1.07)^2

=$572.45

c.Present value=cash flows*Present value of discounting factor(rate%,time period)

=500/1.07

=$467.29(Approx).

d.Present value=cash flows*Present value of discounting factor(rate%,time period)

=500/1.07^2

=$436.72(Approx).