Question

Suppose you receive $1,250 at the end of each year for the next four years. a....

Suppose you receive $1,250 at the end of each year for the next four years. a. If the interest rate is 10%, what is the present value of these cash flows? b. What is the future value in three years of the present value you computed in (a)? c. Suppose you deposit the cash flows in a bank account that pays 10% interest per year. What is the balance in the account at the end of each of the next three years (after your deposit is made)? How does the final bank balance compare with your answer in (b)?

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Answer #1

(a) Annual Annuity = $ 1250, Tenure = 4 years, Interest Rate = 10 %,

Present Value = 1250 x (1/0.1) x [1-{1/(1.1)^(4)}] = $ 3962.33

(b) Future Value of PV at the end of 3 Years = 3962.33 x (1.1)^(3) = $ 5273.86

(c)

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