Question

The cash flow shown below has a variable interest rate. In the first two years (year 0 until year 2) the account makes 8% compounded annually and from year 2 to year ___ the account makes 6% compounded annually. Find the future value in year 4 .

Answer 1

For a variable cash flow of $1, amount after 4 years=Cash flow*(1+year 1 interest)*(1+year 2 interest)(1+year 3 interest)*(1+year 4 interest)=$1*1.08*1.08*1.06*1.06=$1.3106.