Question

1. What is the present value of a $150 lump sum to be received in six years if the opportunity cost rate is 10 percent?

A. $62.09

B. $65.61

C. $84.67

D. $85.69

E. $78.42

2. You buy a seven-year, 6 percent savings certificate for $1,000. If interest is compounded annually, what will its value be at maturity?

A. $1,567.43

B. $1,486.87

C. $1,601.03

D. $1,503.62

E. $1,466.33

Answer 1

A.

Present value is the present worth of cash that is to be received in the future, if future value is known, rate of interest in r and time is n then PV is

PV = FV/ (1 + r) ^n

Where,

FV = $150

Rate of interest [r] = 10%

Time (n) = 6

Let's put all the values in the formula

= 150/ (1 + 0.1) ^6

= 150/ (1.1) ^6

= 150/ 1.771561

= 84.67

2.

Future value is calculated by compounding the Present cash flow

The formula is,

FV = Present value *(1 + r)^n

Where,

               Present value = $1000

               Time (n) = 7

               Interest rate [r] = 6%

FV = 1000*(1 + 0.06)^7

      = 1000*(1.06)^7

      = 1000*(1.503630259)

      = 1503.63