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Your uncle died last year and left you money in his will. You are to receive $70,000 three years from today (i.e., in time 3).

(a) What is the value of the inheritance today (in time 0) if the appropriate discount rate is 4% and you compound annually?

70,000/((1.04)^3)=62229.75

(b) If you invest the money when you receive it in time 3, how much will it grow to 25 years from today (i.e., in time 25) if you earn 4% each year?

70000+(1.04)^25= 186608.54

3. Your neighbor is buying a new recreational vehicle (RV). He has the following options to finance the RV:

I. Pays $42,000 today (in time 0)

II. Buy under a “no payments for two years” program by agreeing to pay $45,000 two years from today (in time 2).

III. Make 72 monthly payments over 6 years of $675 payable at the end of each month.

A) If the interest rate is 7% annually, calculate the present value of each option.

I) 42,000/(1.07)^0=42,000

II) 45,000/(1.07)^2=39304.74

(72*675=48600

III) 48600/(1.07)^6=32384.23

(b) How low does the interest rate have to fall before Option I is a better deal than Option II?

3% 45,000/(1.03)^2=42416.82