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Time Value of Money

Time Value of Money

Time Value of Money
1. Future value (LO2) You invest $2,500 a year for three years at 8 percent.
a. What is the value of your investment after one year? Multiply $2,500 × 1.08.
b. What is the value of your investment after two years? Multiply your answer to part a by 1.08. c. What is the value of your investment after three years? Multiply your answer to part b by 1.08. This gives your final answer.
d. Confirm that your final answer is correct by going to Appendix A (future value of $1), and looking up the future value for n = 3, and i = 8 percent. Multiply this tabular value by $2,500 and compare your answer to the answer in part c. There may be a slight difference due to rounding.
9-1. Solution:
a. $2,500 × 1.08 = $2,700 b. $2,700 × 1.08 = $2,916 c. $2,916 × 1.08 = $3,149.28 d. Appendix A (8%, 3 periods) FV = PV × FVIF $2,500 × 1.260 = $3,150

2. Present value (LO3) What is the present value of:
a. $8,000 in 10 years at 6 percent? b. $16,000 in 5 years at 12 percent? c. $25,000 in 15 years at 8 percent?

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