# present value or future value CONFUSED

• Aug 4th 2009, 05:32 AM
diehardmath4
present value or future value CONFUSED
Two payments of \$850 and \$600 must be made two years and five years from now respectively. If money can earn 4% compounded semi-annually,what single payment,three years from now, would be equivalent to the two scheduled payments? Use the date of the single payment as the frocal date

for that question i bought the \$850 payment which must be paid two years from now to the present and the \$600 payment which should be paid 5 years from now to the presnt

i'm confused
• Aug 4th 2009, 06:20 AM
LochWulf
Whichever process suits you (or do it 2 or three different ways, just as a check).

As you've started, you can PV the two given amounts back to today. Then compound (FV) that single amount forward for six periods (three years, with semi-annual compounding).

Or (just as an example), you can FV the 850 forward for 2 periods, and discount the 600 back for 4 periods, and sum. Identical results. (Actually, I think this particular approach is more consistent with the instructions to use the t=3 point as the 'focal' date.)

There's actually no limit to the ways to arrive at the correct answer. For example, if you discount a given amount back 5 periods, and then forward 3 periods, it's the same result as if you'd discounted it back 2 periods, or back 17 and forward 15, or.....you get the drift. While it's a waste of time to actually do all that, the intuitive understanding of the underlying principal can be real helpful in visualizing the problem before you hit the calculator.
• Aug 4th 2009, 10:25 AM
Wilmer
x = payment end of 3rd year

x(1.02)^4 = 850(1.02)^6 + 600

Solve for x