A small business expects an income stream of $4000 per year for a four-year peri
ID: 2833931 • 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
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 = $ 4000/[(1/1.02) + (1/1.02)^2 +(1/1.02)^3 +(1/1.02)^4] = $ 15230.91
(ii) 8%
Present Value = $ 4000*[(1/1.08) + (1/1.08)^2+ (1/1.08)^3 + (1/1.08)^4] = $13248.50
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 = $ (4000*((1.02)^3 +(1.02)^2+1.02+1] = 16486.432
(ii) Value= $4000*[(1.08) + (1/1.08)^2 +(1/1.08)^3 +1] = 18024.45