Homework Answers
The present value indicates that an amount of money earned in present worth more than the same amount in the future.It also indicates that the present value of money received in future is less worth than the amount earned in present . If the money is left idle , then it's value will get eroded by the inflation in the coming years . To the contrary present value also shows that money invested will earn some returns on it at an assumed rate which may be either the opportunity cost or the rate as may be assumed to be fit.
Future value to the contrary shows the future value of currently available money . It takes into account the effects of inflation and risks associated with the rate used for compounding .
In the above question , the PV and FV of Contract 2 is the highest, hence option e is correct .
| Rookie Quarterback | ||||||
| Comparison of Future Value and present value for selction of contract | ||||||
| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Total | |
| a | Contract 1 | $ 350,000.00 | $ 350,000.00 | $ 350,000.00 | $ 350,000.00 | $ 1,400,000.00 |
| b | Contract 2 | $ 250,000.00 | $ 300,000.00 | $ 450,000.00 | $ 550,000.00 | $ 1,550,000.00 |
| c | Contract 3 | $ 600,000.00 | $ 150,000.00 | $ 150,000.00 | $ 150,000.00 | $ 1,050,000.00 |
| d | Present Value factors @ 9% | 0.9174 | 0.8417 | 0.7722 | 0.7084 | |
| (1/1+0.09) | ||||||
| e | Future Value compounding @ 9% | |||||
| (1*1.09) | 1.2950 | 1.1881 | 1.0900 | 1.0000 | ||
| PV of Contract 1 ( ax d) | 321,101.00 | 294,588.00 | 270,264.00 | 247,949.00 | 1,133,902.00 | |
| PV of Contract 2 (bx d) | 229,358.00 | 252,504.00 | 347,483.00 | 389,634.00 | 1,218,979.00 | |
| PV of Contract 3 ( c x d) | 550,459.00 | 126,252.00 | 115,828.00 | 106,264.00 | 898,803.00 | |
| FV of Contract 1 ( ax e) | $ 453,260.00 | $ 415,835.00 | $ 381,500.00 | $ 350,000.00 | 1,600,595.00 | |
| FV of Contract 2 (bx e) | $ 323,757.00 | $ 356,430.00 | $ 490,500.00 | $ 550,000.00 | 1,720,687.00 | |
| FV of Contract 3 ( c x e) | $ 777,017.00 | $ 178,215.00 | $ 163,500.00 | $ 150,000.00 | 1,268,732.00 | |
| The future rate compounding has been done in a reversing order assuming that , the money received | ||||||
| at the end of the 4th year will not have any re investment . The first year income can be reinvested for 3 years, | ||||||
| the income for 2nd year can be reinvested for 2 years and for third year will be reinvested for 1 year only. | ||||||
| In the given scenario we have been given the following information | |||||
| Down payment that will be done | $ 5,000 | ||||
| Montly installment that will be paid i.e EMI- Equated monthly instalment | $ 400 | ||||
| APR i.e Annual percentage rate | 9% | ||||
| Tenure 1 | 48 months or 4 years | ||||
| Tenure 2 | 60 months or 5 years | ||||
| We need to find out the amount to be financed | |||||
| Formula to compute EMI | |||||
| EMI = P × r × (1 + r)n/((1 + r)n - 1) | |||||
| where , | |||||
| P= Loan amount to be taken , | |||||
| r= rate of interest, | |||||
| n=period in number of months. | |||||
| When Tenure is 48 months | |||||
| Putting the values in equation we get , | |||||
| 400=P x 0.09/12x(1+.09)/12x 48/((1.09)/12x 48-1) | |||||
| 1/P = (0.09/12*1.0075*48)/(1.0075*48-1) | |||||
| 1/P = 0.007658361 | |||||
| P= 130.58 | $ 130.58 | ||||
|
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