Present value and future value

[BettBee23]

Hi,

I'm starting this off by saying that finance class confuses me to begin with. One of the hardest things that we are going over is the present value and future value of money. I have this problem that part of it is throwing me for a loop. It goes like this:

You will receive $5,000 three years from now. The discount rate is 8 percent.
a.) What is the value of your investment two years from now? Multiply 5,000*0.926 (one year's discount rate at 8 percent).

b.) What is the value of your investment one year from now? Multiply your answer to part a by 0.926 (one year's discount rate at 8 percent).

c.) What is the value of your investment today? Multiply your answer to part b by 0.926 (one year's discount rate at 8 percent).

d.) Confirm that your answer to part c is correct by going to appendix B (present value of a dollar) for n=3 and i=8 percent. Multiply this tabular value by $5,000 and compare your answer to part c. There may be a slight difference due to rounding.

Alright. The wording throws me off some. Sometimes I think the people who write these books write clear as mud. Anyways.

I believe a = $5,832

5,000(1.08)(1.08)= $5832


part b is equivalent to $5,400

5,000(1.08)= 5,400 or

part c is $5,000
5,400/1.08= 5000

Appendix b (present value) states that i=8, n= 3 is 0.794.

Part d says that my answer to part d and part c should be close but I have a difference of $1,030.

5,000(0.724)= $3,970


I did not multiply 5,000 by 0.926 like it says to because that makes my answer into a value lesser than the $5,000. I know that money decreases in time but the rate on the investment is supposed to make up for that. I also used a present value/future value calculator online and came up with the answers I got in my calculations where I multiplied by 1.08. I have gone over and over these problems. I had one short session with a tutor (which was all he was available at the time.) Am I doing this wrong?

 

[Denis]

Am I doing this wrong?

Yes. VERY wrong :shock:

To start, you said "I know that money decreases in time":
that has NOTHING to do with the problem; I repeat, NOTHING.

If you will receive $5000 in 3 years, then at ANY TIME before the 3 year period ends,
the value of the investment will be LESSER than $5000: all that's happening is the
initial investment is gradually increasing (at 8% annually) to reach $5000.

These are the increasing values:
0: 3969.16 (initial investment)
1: 4286.69 (after 1 year)
2: 4629.63 (after 2 years)
3: 5000.00 (after 3 years)

Using formula: 3969.16 * (1.08)^3 = 5000.00

Example; year1 to year2
4286.69 * 1.08 = 4629.63

4629.63 / 1.08 = 4286.69

Them's the mechanics.
Make sure you grasp/understand; if not, you're in trouble as it'll get more complicated.

I suggest you go here; if you're able to follow, then you should be ok. Bonne chance.

EDIT: http://www.getobjects.com/Components/Fi ... cepts.html
(thanks Sir Can!)

 

[Deleted member 4993]

.

I suggest you go here; <<< Where ??? Canada ???

if you're able to follow, then you should be ok. Bonne chance.