Suppose a relative has promised to give you $1,000 as a wedding gift the day you

Question

Suppose a relative has promised to give you $1,000 as a wedding gift the day you get engaged. Assuming a constant interest rate of 7%, consider th present and future values of this gift, depending on when you become engaged Complete the first row of the table by determining the value of the gift in one and two years if you become engaged today Present Value (Dollars) 1,000.00 Value in One Year Value in Two Years Date Received Today In 1 year In 2 years (Dollars) (Dollars) 1,000.00 1,000.00 greater Complete the first column of th smaller computing the present value of the gift if you get engaged in one year or two years. The present value of the gift is if you get engaged in two years than it is if you get engaged in one year.

Explanation / Answer

6.

7.

Project A:

PV = -15 + 12(P/F, 6%, 1) + 11(P/F, 6%, 2)

= -15 + (12 * 0.9434) + (11 * 0.8900)

= -15 + 11.32 + 9.79 = $6.11 million

So, the NPV of project A is roughly $6.11 million

Project B:

PV = -13 + 10(P/F, 6%, 1) + 8(P/F, 6%, 2)

= -13 + (10 * 0.9434) + (8 * 0.8900)

= -13 + 9.43 + 7.12 = $3.55 million

So, the NPV of project B is roughly $3.55 million

Please ask next question in another post.

Date Received PV($) Value in one Year($) Value in Two Year($) Today 1000 1070[i.e. 1000(F/P, 7%, 1) = 1000 * 1.070] 1145[i.e. 1000(F/P, 7%, 2) = 1000 * 1.145] In one Year 934.60[i.e. 1000(P/F, 7%, 1) = 1000 * 0.9346] 1000 1070[i.e. 1000(F/P, 7%, 1) = 1000 * 1.070] In Two Year 873.4 [i.e. 1000(P/F, 7%, 2) = 1000 * 0.8734] 934.53[i.e. 873.4(F/P, 7%, 1) = 1000 * 1.070] 1000

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