Question

Your parents tell you that if you apply yourself and earn a minimum grade of B​ - in Finance​ 3101, they will reward you by depositing in your account​ $1,050 next​ year, $1,500 the following year and​ $2,500 the year after that. If you can earn an annual rate of​ 4%, how much would you have in your account immediately after your​ parents' final​ deposit?

Your parents have promised you possible deposits of​ $!,050, $1,500 and​ $2,500 at the end of the next three​ years, respectively. If your parents can earn​ 6% per​ year, what size of a​ one-time deposit would they have to make today in order to keep their​ promise?

Answer 1

Both these questions require application of time value of money function, which is FV = PV * (1 + r)ⁿ

Part 1 of Question: We need to calculate FV of the cash flows at year 3. First cash flow should be compounded for 2 years, second for 1 year and last one already at its FV.

FV = 1135.68 + 1560 + 2500 = $5,195.68 (Answer Part 1)

Part 2: We need to calculate the PV of share today for all three cash flows.

PV = 990.57 + 1334.99 + 2099.05 = $4,424.61(Answer Part 2)