Question

1. 1 year(s) ago, Vince had 143,500 dollars in his account. In 4 year(s), he expects to have 309,100 dollars. If he has earned and expects to earn the same return each year from 1 year(s) ago to 4 year(s) from today, then how much does he expect to have in 2 year(s) from today?

2. Sasha owns two investments, A and B, that have a combined total value of 45,300 dollars. Investment A is expected to pay 21,000 dollars in 7 year(s) from today and has an expected return of 13.24 percent per year. Investment B is expected to pay X in 4 years from today and has an expected return of 7.99 percent per year. What is X, the cash flow expected from investment B in 4 years from today?

Answer 1

1)

We are given,

Value 1 yr ago = $143,500

Value in 4 years time = $309,100

Time period = 5 years

We have to first calculate the rate of return.

FV = PV * (1+r)^t

309,100 = 143,500 * (1+r)^5

We can also do this in excel.

Present Value	143,500
no periods	5
Future Value	309,100
Rate	16.59%	(=Rate(5,0,-143,500,309,100,0)

Value in 2 years from now,

FV in two years = 143,500 * (1 + r)^3

Value in two years = 143500*(1+0.1659)^3 = $227,405.08

Hence value in 2 years time is $227,405.08.

2)

the combined total value of A and B = $45,300

Value of A after 7 years(Future value) = $21,000

Time = 7 years

Return = 13.24%

PV of A = FV / (1+r)^7

PV of A = 21,000 / (1.1324)^7 = $8,794.68

PV of B = Combined value - PV of A = 45300 - 8794.68 = $36,505.32

PV of B = $36,505.32

return = 7.99%

cash flow expected from investment B in 4 years = ?

FV = PV * (1+0.0799)^4

FV = 36,505.32 * (1.0799)^4 = $49,646.69

Hence value of investment B in 4 years = $49,646.69.

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