Question

Create a cash flow diagram for the following scenario by entering the letter denoting the correct location of the corresponding parameter in the cash flow diagram. For example, enter A for a positive cash flow at time O. A farmer makes three consecutive deposit of $1,000 each in years 3 . and 5 , at 3% interest per year. He then plans to withdraw the balance in full after 3 more years. 0 L M N O PQ R S T U V Next

Answer 1

The farmer deposits an amount of $ 1000 each in Year 3, Year 4 and Year 5 which earn interests at 3 % per annum. Further, he/she withdraws the accumulated amount after three more years (from the date of the last deposit). The numerical values corresponding to each alphabet will be as described below:

O (Year 3) = $ 1000, P (Year 4) = $ 1000 and Q (Year 5) = $ 1000 (The answers are not D, E and F because from the farmer's perspective the deposits are cash outflows which are represented by downward arrows whereas upward arrows represent cash inflows).

I = Future Value of the three deposits withdrawn at the end of Year 8 (Upward Arrow indicated withdrawal or cash inflow for the farmer)

Future Value of Deposits at the end of Year 8 = 1000 x (1.03)^(5) + 1000 x (1.05)^(4) + 1000 x (1.05)^(3) = $ 3649.413

Therefore, I = $ 3649.413