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Suzanne opens an account at a local bank on January 1, 2004 with a deposit of...

Suzanne opens an account at a local bank on January 1, 2004 with a deposit of 4000 dollars. On October 1, 2004 she withdraws 1430 dollars. On April 1, 2005 she withdraws 850 dollars. And on April 1, 2007 she deposits 2090 dollars. Find the total present value of these transactions on July 1, 2006, if the account earns interest at a nominal rate of 7.6 percent convertible quarterly.

The solutions I've found on the website have not taken into account the future deposit and are incorrect, any suggestions?

Solutions

Expert Solution

Deposit 1 at 1st jan, 2004

Given : Amount = 4,000

Time till july 2006 = 2.5 years or 10 quaters

Rate of interest = 7.6% annual rate / 4 = 1.9% Quaterly

Value of deposit 1 at 1st july is calculated by using financial calculator

Inputs : pv = -4,000

Pmt = 0

I/y = 1.9%

N = 10

Fv = compute

We get, value of deposit 1 at 1st July as $4,828.38

Withdrawal at 1st October 2004

Given: amount = 1,430

Time till 1st july 2006 = 7 Quaters

Using financial calculator to calculate value at 1st july 2006

Inputs: Pv = -1,430

I/y = 7.6% / 4 = 1.9%

Pmt = 0

N = 7

Fv = compute

We get the value of withdrawal at 1st july 2006 as $1,631.38

Withdrawal at 1st April 2005

Given: value = $850

Time till 1st july= 5 quaters

Using financial calculator to calculate the value

Inputs: pv = -850

I/y = 1.9%

Pmt = 0

N = 5

Fv = compute

We get the value of withdrawal at 1st july 2006 as $933.88

Deposit at 1st April 2007

Given: Amount = 2,090

Time to 1st july 2006 = 3 quaters

In this case we use the financial calculator to calculate the present value of deposit as it is deposited after the time period at which the value is to be calculated.

Inputs: Fv = 2,090

Pmt = 0

I/y = 7.6% / 4 = 1.9%

N = 3

Pv = compute

We get the present value of deposit on 1st july 2006 as $1,975.26

The total present value on 1st July 2006 = present value of deposit in 2004 - present value of withdrawal

= 4,828.38 -1,631.38 - 933.88

= 2,263.12

We don't take into consideration the deposit of 2007 as the money was not in the account in 2006. So we cannot include the present value of last transaction.

If you need to include, then the present value of last transaction is also calculated above.

jeff jeffy answered 1 month ago
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