Chaine Michaela C.

Castillo Valuation Concepts and Methods

1BSA3 – ABM Prof. Caleb Lapuz Senados

Assignment # 2:

1. Suppose you are depositing an amount today in an account that earns 5% interest,
compounded annually. If your goal is to have $5,000 in the account at the end of six years, how much
must you deposit in the account today?

o Given : A = $5,000
i = (rate/ compounding period) 0.05/ 1 = 0.05
n = (time × compounding period) 6 × 1 = 6
PV = ? unknown

o Solution: PV = A/(1+i)^n
PV = $5,000 / (1 + 0.05) ^ 6
PV = $5,000 / ( 1.05 ) ^ 6
PV = $5,000 / 1. 34009564063
PV = $3,731.08 (Present Value)

2. You have just won a $1 million lottery. This new lottery, however, will pay out the award 60 years from
today. What is the present value of your award based on a 16% interest rate?

o Given : A = $1,000,000
i = (rate/ compounding period) 0.16 / 1 = 0.16
n = (time × compounding period) 60 × 1 = 60
PV = ? unknown

o Solution: PV = A/(1+i)^n
PV = $1,000,000 / (1 + 0.16) ^ 60
PV = $1,000,000 / ( 1.16 ) ^ 60
PV = $1,000,000 / 7,370.201365
PV = $135.68 (Present Value)
3. Mary and Paul have $2,000 to invest. The CD is paying 1.85% compounded semi-annually.
Assuming the rates will not change, how much will their investment be worth in four years?

o Given : P = $2,000
i = (rate/ compounding period) 0.0185 / 2 = 0.00925
n = (time × compounding period) 4×2 = 8
A = ? unknown

o Solution: A= P( 1 + i) ^ n
A= $2,000 (1 + 0.00925) ^ 8
A= $2,000 ( 1.00925 ) ^ 8
A= $2,000 (1.07644058765)
A= $2, 152.88 (Future Value)

4. Mary and Paul have $2,000 to invest. The CD is paying 1.85% compounded semi-annually.
Assuming the rates will not change, how much will their investment be worth in 5 years?

o Given : P = $2,000
i = (rate/ compounding period) 0.0185 / 2 = 0.00925
n = (time × compounding period) 5 × 2 = 10
A = ? unknown

o Solution: A= P( 1 + i) ^ n
A= $2,000 (1 + 0.00925) ^ 10
A= $2,000 ( 1.00925 ) ^ 10
A= $2,000 (1.09644684147)
A= $2, 192.89 (Future Value)