1. Suppose you receive $150 at the end of each year for the next three years.

a. If the interest rate is 9%, what is the present value of these cash flows?

b. What is the future value in three years of the present value you computed in (a)?

c. Suppose you deposit the cash flows in a bank account that pays 9%interest per year. What is the balance in the account at the end of each of the next three years (after your deposit is made)? How does the final bank balance compare with your answer in(b)?

2. Your friend in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $800.However, once built, the machine will last forever and will require no maintenance. The machine can be built immediately, but it will cost $8,000 to build. Your friend wants to know if he should invest the money to construct it. If the interest rate is10.5% per year, what should your friend do?

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