An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%

An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%, what is the present value of this investment?

Answer: 

PV = $500(1/(1.06)3) + $700(1/1.06)5) + $1000(1/(1.06)9)

PV = $500(.840) + $700(.747) + $1000(.592)

       = $420.00 + $522.90 + $592.00

       = $1,534.90

What is the value (price) of a bond that pays $400 semiannually for 10 years and returns $10,000 at the end of 10 years? The market discount rate is 10% paid semiannually.

Answer:  Using a financial calculator N=20, i=5, PMT=400, FV=10000, solve for PV=-5361.77 or $5,361.77

The expected after-tax cash flow from an investment property that you are considering is

Year 1   $25,000

Year 2   $27,500

Year 3   $30,250

At the end of year 3 you expect to sell the property for $400,000.  If the appropriate discount rate is 12%, what is the most you should pay for this property?

Answer:  [25000/(1.12)1 + 27500/(1.12)2 + 302500/(1.12)3 + 400000/(1.12)3] = $350,487.71

In order to send your oldest child to law school when the time comes, you want to accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how much would you have to deposit if:

a. you want to deposit an amount annually at the end of each year?

b. you want to deposit one large lump sum today?

Answer: 

a. PMT = $1,294.26

b. PMT = $14,013.75