ACCOUNTING AND FINANCIAL ENGINEERING - EXAMPLE 34.15 : Based on Time Discounting of Money, let y = x / (1 + r) ^ n, where ^ = power, r = interest rate for the period in decimal value, n = number of periods, y = current value, x = future value. According to Present Value Addition Rule, the present value of a set of future payments is equal to sum for present value of each of the payments. In an engineering business, 3 future payments are to be made : $100 after 1 year; $500 after 2 years; $200 after 3 years. (a) Form an equation of y as a function of r. (b) Find the value of y in 5 decimal places if r = 8 %.
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Answer Posted / kangchuentat
ACCOUNTING AND FINANCIAL ENGINEERING - ANSWER 34.15 : (a) First future payment : n = 1, x = $100. Second future payment : n = 2, x = $500. Third future payment : n = 3, x = $200. Then total y = sum of x / (1 + r) ^ n = 100 / (1 + r) + 500 / (1 + r) ^ 2 + 200 / (1 + r) ^ 3. (b) When r = 8 % = 0.08, y = 100 / (1 + 0.08) + 500 / (1 + 0.08) ^ 2 + 200 / (1 + 0.08) ^ 3 = 680.02845 (5 decimal places). The answer is given by Kang Chuen Tat; PO Box 6263, Dandenong, Victoria VIC 3175, Australia; SMS +61405421706; chuentat@hotmail.com; http://kangchuentat.wordpress.com.
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