Question

Suppose you receive 1000 at the end of this year, 1500 a year later than this, and 2500 2 years from the initial 1000. If you can invest each cash flow at an interest rate of 8%, how much money will you have at the end of 5 years

Answer 1

Here formula of future value can be used

FV = Amount(1+r)^n

r = rate of interest = 8%

n = no of years

First amount of $1000 is received at end of year 1 , hence it will kept in savings account for 4 years

Thus FV of $1000 = 1000(1+8%)^4

=1000(1+0.08)^4

=1000(1.08)^4

=1000(1.36049)

=1360.49 $

Second amount of $1500 is received at end of year 2 , hence it will kept in savings account for 3 years

Thus FV of $1500 = 1500(1+8%)^3

=1500(1+0.08)^3

=1500(1.08)^3

=1500(1.25971)

=1889.57 $

Third amount of $2500 is received at end of year 3 , hence it will kept in savings account for 2 years

Thus FV of $2500 = 2500(1+8%)^2

=2500(1+0.08)^2

=2500(1.08)^2

=2500(1.1664)

=2916 $

Thus total amount after 5 years = 1360.49 $ + 1889.57 $ + 2916 $

= 6166.06 $