RE: Week 5 Discussion

Question

deteminethe persent value if 5000 is received at the end each indicated time period in each of the following situation 5 percent for ten years

Answer 1

If simple interest applies, and original amount is A, the interest after 10 years @5% is A×10×0.05=0.5A.

Add this to the original amount A and we get 1.5A.

So to earn 5000 in 10 years, the present value is A where 1.5A=5000.

And A=5000/1.5=⅔ of 5000=10000/3=3333.33.

If annual compound interest applies then A(1.05)¹⁰=5000, and A=5000/1.05¹⁰=3069.57 present day value.