5-1 FUTURE VALUE If you deposit $2,000 in a bank account that pays 6% interest annually, how much will be in your account after 5 years? 5-7 PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An investment will pay $150 at the end of each of the next 3 years, $250 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 11% annually, what is its present value? Its future value? 5-9 5-10 PRESENT AND FUTURE VALUES FOR DIFFERENT PERIODS Find the following values using the equations and then a financial calculator. Compounding/discounting occurs annually. a. An initial $600 compounded for 1 year at 6% b. An initial $600 compounded for 2 years at 6% c. The present value of $600 due in 1 year at a discount rate of 6% d. The present value of $600 due in 2 years at a discount rate of 6% PRESENT AND FUTURE VALUES FOR DIFFERENT INTEREST RATES Find the following val- ues. Compounding / discounting occurs annually. An initial $200 compounded for 10 years at 4% . An initial $200 compounded for 10 years at 8% The present value of $200 due in 10 years at 4% . The present value of $1,870 due in 10 years at 8% and at 4% Dene present value and illustrate it using a time line with data from part d. How are present values affected by interest rates? ranova 529 530 BUILDING CREDIT COST INTO PRICES Your firm sells for cash only, but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. To carry these receivables, you would have to borrow funds from your bank at a nominal 9%, daily compounding based on a 360-day year. You want to increase your base prices by exactly enough to offset your bank interest cost. To the closest whole percentage point, by how much should you raise your product prices? REACHING A FINANCIAL GOAL Allison and Leslie, who are twins, just received $10,000 each for their 25th birthday. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her \"early retirement fun \" on her birthday, beginning a year from today. Allison opened an account with the Safety First Bond Fund, a mutual fund that invests in high-quality bonds whose investors have earned 8% per year in the past. Leslie invested in the New Issue Bio-Tech Fund, which invests in small, newly issued bio-tech stocks and whose investors have earned an average of 13% per year in the fund's relatively short history. a. If the two women's funds earn the same returns in the future as in the past, how old will each be when she becomes a millionaire? b. How large would Allison's annual contributions have to be for her to become a millionaire at the same age as Leslie, assuming their expected returns are realized? c. Is it rational or irrational for Allison to invest in the bond fund rather than in stocks