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Math Help - present value or future value CONFUSED

  1. #1
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    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
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  2. #2
    Junior Member
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    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.
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  3. #3
    MHF Contributor
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    x = payment end of 3rd year

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

    Solve for x
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