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You have just received a windfall from an investment you made in a​ friend's business. She will be paying you $ 39 comma 481 at the end of this​ year, $ 78 comma 962 at the end of next​ year, and $ 118 comma 443 at the end of the year after that​ (three years from​ today). The interest rate is 8.8 % 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)?

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Answer:

a. Present value is 194958

b. Future value is 251089

Explanation:

a. We use excel to get the present value.  We represent a cash flow and then we apply the formula

=VNA (required rate of return; Net cash flow from moment 0 to moment 3 )

See cash flow attached.  

Also we can use the interest formula and calculate each

The formula of interest is A=P (1+r)ⁿ

A=Final amount  

P= Principal ( deposit)  

r= interest rate

n= time

To get the Present value we are looking for the principal P

P= A/(1+r)ⁿ

P 1 year= 39481/ (1+0,088)¹ =36288

P 2 year= 78962/(1+0,088)²=66705

P 3 year= 118443/(1+0,088)³=91965

So Present Value is =36288+66705+91965=194958

b.

To get Future Value we can use the present value

FV=PV (1+r)ⁿ

FV= 194958 *(1,088)³=251089

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