Question

Give an example of a retirement planning problem whose solution involves calculating the present value of multiple cash flows. Give another example whose solution involves calculating the future value of multiple cash flows.

Answer 1

Let us take the example when you have multiple sources of income and those sources of income can be uneven for example if you have invested in different schemes for retirement and those schemes will give you different returns over a period of time after retirement then one needs to calculate the present value of those investments to actually know that how they are worth now so that one can do planning for the retirement depending upon the present needs.

Let's take an example where we need to know the future value of multiple cash flows , this is mostly used when we have fixed amount in mind that after x years my corpse by having multiple cashflows should be Y, if we know the Y then after estimating the future value of multiple cash flows we can compare how much excess of less contribution we need to make to achieve our target Y. This is basically used in retirement planning where one knows in advance how much one needs to save.