Consider an investment that pays nothing next year, $2000 in two years, $3000 in three years, and $5000 in four years. The expected rate of return is 5% per year.

What is the current value V₀ of this investment?

Find the value V₂ at the end of year 2 (immediately after the $2000 payment is made) two “different”ways:

by compounding today’s value for two years

by discounting the final two payments back to year 2