A small business expects an income stream of $4000 per year for a four year peri
ID: 2833855 • Letter: A
Question
A small business expects an income stream of $4000 per year for a four year period.
(a) Find the present value of the business if the annual interest rate, compounded continuously, is the following.
Round your answers to two decimal places.
(i) 2%
Present Value = $ ______________________
(ii) 8%
Present Value = $_______________________
(b) In each case, find the value of the business at the end of the four-year period. Round your answers to two decimal places.
(i) Value =$__________________
(ii) Value=$___________________
Explanation / Answer
Compound Interest = P(1+r/100)n ,
where P : present value,
r : rate of interest
n : no. of years
Income is 4000$ per year, at the end of 4 years C.I. should be $16000
a)
(i) 16000 = P (1+2/100)4
P = $14781.53
(ii) 16000 = P (1+8/100)4
P = $11760.48
b)
Value of company at the end of fourth year = Value of company in the starting of first year + interests applied for 4 years
(i) Value = $14781.53 + $16000 = $30781.53
(ii) Value = $11760.48 + $16000 = $27760.48