Question

Assume you inherit $300,000 today and you decide to invest that money in a money market account. To build up your savings for your retirement, you decide to make yearly deposits of $20,000 for 10 years into that same account. However, you can only start your yearly deposits two years from now. What is the NPV of this cash flow, assuming a return of 5% a year?

Answer 1

Ans. Cash flow stream,

Year. Cash flow

0. 300000

1. 0

2. 20000

3. 20000

4. 20000

5. 20000

6. 20000

7. 20000

8. 20000

9. 20000

10. 20000

11. 20000

Net present value of these cash flows at rate of return 5%,

NPV = 300000 + 0/(1+0.05) + 20000/(1+0.05)^2 + 20000/(1+0.05)^3 + 20000/(1+0.05)^4 + 20000/(1+0.05)^5+20000/(1+0.05)^6 + 20000/(1+0.05)^7 + 20000/(1+0.05)^8 + 20000/(1+0.05)^9 + 20000/(1+0.05)^10 + 20000/(1+0.05)^11

=> NPV = $466128.28

Thus, net present value of the savings is $466128.28

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