Question

1.a Explain the formula PV= FV/ (1 + r)

1. b Explain the formula FV = PV ( 1+r)

1. c What is meant by the expression COMPOUNDING?

1. d Explain the 5 unknowns (N I/Y PMT PV FV)

1. e If you received $1,000 a year on Dec 31 for the next five years, how much would it be the PRESENT VALUE at a 6% discount rate?

1. f If you invested $ 2,000 at 8%, what is the FUTURE VALUE after 3 years?

1.g Explain difference between compounding interest and simple interest which one is used with retirement accounts?

1. h If you put $ 100 into an account for 5 years, calculate a 10% compounding growth rate.

1. i If an investment is earning 3 % how long will it take to double?

1. j Define each variable in the equation P = (D1 + P1) / (1 + R)

1.k Solve the NPV and solve for the Payback

YR Cash Flow

0 -$26,000

1 11,000

2 14,000

3 11,000

with the required rate equal to 6%

Answer 1

1.a]

PV = FV / (1 + r)n

This calculates the present value (PV) today of a sum received in the future (FV). Here, r = annual rate of interest, and n = number of years.

1.b]

FV = PV * (1 + r)n

This calculates the future value (FV) of a sum received today (PV). Here, r = annual rate of interest, and n = number of years.

1.c]

Compounding means that the interest earned during the period on a sum of money is added to the principal at the end of each interest period. Thus, the original principal does not remain fixed, but keeps growing as the periodic interest is added to it. Thus, the sum invested grows at a compound rate. This is the meaning of compounding.

1.d]

N = number of periods. This is the number of periods in the investment / calculation period.

I/Y = periodic interest rate. This is the periodic discount rate / interest rate.

PMT = periodic payment. This is the periodic payment/receipt of an annuity amount.

PV = present value.

FV = future value