Question

Problem 4 Company ABC has an instantaneous investment stream, S(n), over 2 years that can be represented as a continuous first-degree polynomial function as given in the below figure for Year 1 and Year 2. Part A: If a continuously compounded interest is applied to the instantaneous cash flow investment stream, determine the future worth of the investment at the end of Year 6. Investment Stream $1,000 /year Line = S(n) Investment Stream, $/year Time, years Part B: If the investment stream was abruptly discontinued at the end of Year 1, how much accumulated interest is lost from the future value after 6 years compared to Part 1? (Hint for investments: I =F-T). For both Part 1 and Part 2 of Problem 4, the nominal interest rate is 15%/year

Answer 1

PartA: In the given question the investment is $1000 now, Year 1 and Year 2. So the Investment in total is $ 3000 and asking the future value after 6 years yearly compounding with interest rate of 15% p.a the the future worth of Investment at the end of year 6 is $ 6073. The Interest amount earned is $ 3073 and the amount of Investment is $3000

PartB: if Investment is $1000 invested now and discontinued from the end of Year 1 the compounded interest earned on $ 1000 is $ 1313. So the total Investment at the end of Year 6 is $ 2313. The loss of Interest for discontinuation is $1760(3073-1313)