What is the present value of expected windfall now

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Time Value of Money Practice

You expect to receive $500 one year from now. You can earn an annual return of 3% per year, compounded annually, on money invested today.

Problem a. What is the present value of your cash windfall?

Problem b. Suppose the annual return you can earn on money today falls to 1%. What is the present value of your expected windfall now? Are you happy or sad about the discount rate decline?

Problem c. Suppose the annual return you can earn on money today rises from 3% to 5%. What is the present value of your expected windfall now? Are you happy or sad about the discount rate increase?

Problem d. How would your answers to a., b. and c. change if you expected to pay $500 one year from now instead of receive $500?

Problem e. Describe in your own words how discount rate changes affect present values and who is helped and hurt by these changes.

Reference no: EM132996223

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