Problems
10. Each of the problems below provides practice with present value
calculations.
a. At an annual interest rate of 3.5 percent, what is the
present value of a single payment of $1000 to be received
one year from now?
b. At an annual interest rate of 3.5 percent, what is the
present value of a single payment of $1000 to be received
three years from now?
c. At an annual interest rate of 3.5 percent, what is the
present value of a stream of payments of $1000, each to
be received at the end of one year, two years, and three
years?
d. What is the present value of a lottery prize that pays you
$1 million today plus $1 million one year from now plus
$1 million two years from now?
e. How much would you need to deposit today in a bank
account paying 4 percent interest if you want to withdraw
$5000 one year from now?
f. If your friend offers to loan you $12 000 today to buy a
used car, and wants you to repay him $13 500 in two
years, should you accept this offer? The market interest
rate on a loan from the bank is 4 percent.