Question

1. For each of the following, draw a diagram, write an equation of value, and give your (a) What is the present value of $25,000 ten years from now at 8% interest? (b) What is the future value, in ten years, of $25,000 now, at 8% interest? (c) What is the present value of $25,000 ten years from now at 8% discount? (d) What is the future value, in ten years, of $25,000 now, at 8% simple interest?

Answer 1

(a) Present Value =FV/(1+r)^n = 25,000/(1+0.08)^10 = 25,000/1.08^10 = $11,579.84

(b) Future Value = PV*(1+r)^n = 25,000*(1+0.08)^10 = 25,000*1.08^10 = $53,973.12

(c) Discount rate and interest rate are the same thing. So, we get the same answer as in (a)

(d) Interest =PTR = 25000*0.08*10 = 20,000. So, Future value = 25,000+20,000 = $45,000