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You are saving for a trip around the world in 7 years. You have a guaranteed...

You are saving for a trip around the world in 7 years. You have a guaranteed job for the next 3 years and can deposit $5,000/year into a savings account for that time. After that you do not have any jobs lined up and will assume you will not be able to deposit anything in that savings account for the next 4 years. If the rate is 5% on this savings account during this entire time, how much money will you have when you want to take your trip?   Draw timeline. IDENTIFY THE type of TVM cashflow (hint: there are two) and SHOW YOUR WORK step by step.

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Answer #1

From Year 1 to Year 3,

Annual Deposit = $5,000

Time Period = 3 years

Interest Rate = 5% annually

Calculating Future Value,

Using TVM Calculation,

FV(end of Year 3) = [PV = 0, PMT = 5,000, T = 3, I = 0.05]

FV(end of Year 3) = $15,762.50

Future Value(end of Year 7) = 15,762.50(1.05)4

Future Value(end of Year 7) = $19,159.42

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