Question

Problem 4-8 You have just received a windfall from an investment you made in a​ friend's business. She will be paying you $ 39 comma 964 at the end of this​ year, $ 79 comma 928 at the end of next​ year, and $ 119 comma 892 at the end of the year after that​ (three years from​ today). The interest rate is 7.5 % per year. a. What is the present value of your​ windfall? b. What is the future value of your windfall in three years​ (on the date of the last​ payment)? a. What is the present value of your​ windfall? The present value of your windfall is ​$ nothing.

Answer 1

(a): Present value of windfall:

Year (n)	Amount	1+r	PVIF = 1/(1+r)^n	PV = Amount * PVIF
1	39,964	1.075	0.93023	37,175.81
2	79,928		0.86533	69,164.31
3	119,892		0.80496	96,508.33
			Total	202,848.45

Thus the present value of windfall = $202,848.45

(b):

Year (n)	Amount	1+r	FVIF = (1+r)^(3-n)	FV = Amount * FVIF
1	39,964	1.075	1.15563	46,183.40
2	79,928		1.07500	85,922.60
3	119,892		1.00000	119,892.00
			Total	251,998.00

Thus the future value of windfall in 3 years = $251,998.00