Question

Suppose you receive $120 at the end of each year for the next three years. a. If the interest rate is 8%, what is the present value of these cash flows? b. What is the future value in three years of the present value you computed in (a)? c. Suppose you deposit the cash flows in a bank account that pays 8% interest per year What is the balance in the account at the end of each of the next three years (after your deposit is made)? How does the final bank balance compare with your answer in (b)? a. If the interest rate is 8%, what is the present value of these cash flows? The present value of these cash flows is $(Round to the nearest cent.)

Answer 1

Solution a) PV of Annuity factor ( 8%, 3) Annual Cashflows Present Value of Cash flows ($120 x 2.5771) 2.5771 $ 120 $ 309.25 Solution b) FV of Annuity factor ( 8%, 3) Annual Cashflows Future Value of Cash flows ($120 x 3.2464) 3.2464 $ 120 $ 389.57 Solution c) Year Deposit Interest Closing Balance 1 $ 120 $ $ 120.00 2 $ 120 $ 9.60 $ 249.60 3 $ 120 $ 19.97 $ 389.57 Final balance is same as in (b)

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