You have just received a windfall from an investment you made in a friend’s business. He will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at the end of the year after that (three years from today). The interest rate is 3.5% 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)?

Answer:

a. Timeline:

0                                              1                                  2                      3

                                                10,000                                  20,000                      30,000

Present Value would be 10000/1.035 + 20000/(1.035) (Power 2) + 30,000/(1.035)(Power 3)

Which come to 9, 662 + 18, 670 + 27, 058 which would be 55, 390

b. Timeline:

0                                              1                                  2                      3

                                                10,000                                  20,000                      30,000

Future Value would be 55,390 multiplied by 1.035 power 3

And the Future Value would be 61, 412