Question

AT&T LTE 10:24 ANM 85% K IMSE 421-in_class activity 3.docx In class activity Problem 1. (5 minutes individual, 5 minutes in group) Deciding that you want to invest for your retirement, you deposit $20,000 into an investment account today. For the next 25 years, you invest an additional S10,000 per year, with the first deposit made into the account one vear from now. No withdrawals are made from the account. This account offers 7% return on investment each year (ie, use 1-7% per year) a) Draw the cash flow diagram from your point of view b) Calculate the present value of the deposits you made into the account over the 25 year period c) Calculate the account balance at EOY 25 Problem 2. (5 minutes individual, 5 minutes in group) Using the following cash flow diagram, calculate the equivalent cash flow at EOY 3 using an effective annual interest rate of 8%

Answer 1

Refer the attached diagram for the cash flow

Beginning of Year cash outflow is $20,000 and starting from year 1 the cash outflow is $ 10,000 this Out flow is for the next 25 years.

B. The present value of the cash flow stream can be determined using the following mathematical expression

PV = $ 20,000+ $ 10,000(PVIFA_{7%, 25})

PV = $ 20,000 + $ 10,000*11.654

PV = $ 20,000 + $ 116,540

PV = $ 136,540

C. The future value of the cash flow stream can be written mathematically as follows

FV = $ 10,000(FVIFA_7%,25) + $ 20,000(FVIF_7%,25)

FV = $ 10,000*63.249 + $ 20,000*5.427

FV = $ 632,490 + $ 108,540

FV = $ 741,030

2. The values on the cash flow diagram is not visible. I request you to kindly reupload the picture.

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