Finance calculating PV and FV

Question

You have just received a windfall from an investment you made in a friend’s business. She will be paying you $10,400 at the end of this year, 20,800 at the end of next year, and $31,200 at the end of the year after that (three years from today). The interest rate is 13.7% per year.

a. What is the present value of your windfall?

b. What is the future value of your your windfall in three years (on the date of your last payment)?

Answer 1

We will be calculating the Present Value and Future Value of the given cash flow stream:

Year 1: $10,400

Year 2: $20,800

Year 3: $31,200

when the interest rate is 13.7%. This is also the discount rate, and written in decimal form, 13.7%/100% = 0.137.

a. Present Value of the cash flows:

PV = FV / (1+r)^t = 10,400 / (1+0.137)^1 + 20,800 / (1+0.137)^2 + 31,200 / (1+0.137)^3 = $46,462.62.

b. Future Value of the windfall:

FV = PV (1+r)^t = 46,462.62 (1+0.137)^3 = $68,294.39.