Question

If you invest $2,000 today, withdraw $1,000 in 3 years, deposit $3,000 in 5 years, deposit $1,500 in 8 years. (a) Draw the cash flow diagram from your perspective. (b) How much will you withdraw if you decide to withdraw the entire sum three years after the final deposit and the interest rate is 7%. Show your calculations to get credit. (c) Find the present worth equivalent using the actual cash flows and interest rate of 7%. Show your calculations to get credit.

Answer 1

For cash flow, deposit is outflow and withdrawal is inflow

Year	Cash Flow
0	-2,000.00
1
2
3	1,000.00
4
5	-3,000.00
6
7
8	-1,500.00

CFD

B. & C part

Present worth of deposit = 2000 -1000*(P/F, 7%, 3) + 3000*(P/F, 7%, 5) + 1500*(P/F, 7%, 8)

= 2000 -1000*0.816298 + 3000*0.712986 + 1500*0.582009

= 4195.67

Future worth of deposit at EOY 11 = 4195.67 *(F/P, 7%, 11) = 4195.67 * 2.104852 = 8831.27