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Chapter 5 Questions - Problems

The document discusses the formulas for calculating present value (PV) and future value (FV) of lump sums, providing examples and calculations for both. It highlights the relationship between PV and FV, including how to solve for the interest rate (r) in various scenarios. Additionally, it emphasizes the benefits of investing earlier rather than later.

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5 views3 pages

Chapter 5 Questions - Problems

The document discusses the formulas for calculating present value (PV) and future value (FV) of lump sums, providing examples and calculations for both. It highlights the relationship between PV and FV, including how to solve for the interest rate (r) in various scenarios. Additionally, it emphasizes the benefits of investing earlier rather than later.

Uploaded by

Rob
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 5 Questions:

To find the PV of a lump sum, we use:


PV = FV / (1 + r)t
PV = $575,000,000 / (1.068)20 = $154,256,257.60

To find the FV of a lump sum, we use:


FV = PV x (1 + r)t
FV = $50(1.041)108 = $3,833.97

We can use either the FV or the PV formula. Both will give the same answer since they are
the inverse of each other.
We will use the FV formula, that is: FV = PV x (1 + r)t
Solving for r, we get:
r = (FV / PV) 1 / t – 1
= ($3,776,270 / $15,000)1/45 – 1 = 13.07%
To find the FV of the first prize in 2040, we use: 2015 to 2040 is 25 years = t
FV = PV x (1 + r)t
FV = $3,776,270 (1.1307)25 = $81,423,139.28
If using calculator – have to do PV as negative or won’t work
To find the PV of a lump sum, we use:
PV = FV / (1 + r)t
PV = $3,200,000 / (1.2553)76
= $0.10

We will use the FV formula, that is:


FV = PV x (1 + r)t
Solving for r, we get: r = (FV / PV) 1 / t – 1
r = ($10,311,500 / $12,377,500)1/4 – 1
= – 4.46%
Notice that the interest rate is negative. This occurs when the FV is less than the PV.
FV = PV x (1 + r)t
Solving for r, we get: r = (FV / PV) 1 / t – 1
a. PV = $100 / (1 + r) 6 = $76.04
r = ($100 / $76.04)1/6 – 1 = 4.67%
b. PV = $81 / (1 + r) 1 = $76.04
r = ($81 / $76.04)1/1 – 1 = 6.52%
c. PV = $100 / (1 + r) 5 = $81.00
r = ($100 / $81)1/5 – 1 = 4.30%

To find the FV of a lump sum, we use:


FV = PV x (1 + r) t
FV = $5,000 (1.11)45 = $547,651.21
FV = $5,000 (1.11)35 = $192,874.26
This suggests investing earlier is much better than investing later.

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