Question

You have just applied for a job contract at LSP Company. This company will pay you $75 at the end of the first year, $225 at the end of the second year, and $300 at the end of the fourth year. Currently you have a saving account in the bank that pays you a rate of 8% compounded annually. What is the future value of such contract at the end of the fourth year? *

Answer 1

The formula for calculating Future value of an investment where interest is compounded annually is as below

FV = I * (1+r)^n

where I is Investment

r is the rate of interest

n is the number of years

a) For the $75 received at the end of the first year, the details are as below

I = 75, r = 8% and n = 3 (i.e 2nd year, 3rd year and 4th year). Pls note salary is received at the end of first year only.

Hence Future value of $75 at the end of fourth year is 75 * (1+0.08)^3

=> 75*(1.08)^3

=> $94.48

b) For the $225 received at the end of the second year, the details are as below

I = 225, r = 8% and n = 2 (i.e 3rd year and 4th year). Pls note salary is received at the end of second year only.

Hence Future value of $225 at the end of fourth year is 225 * (1+0.08)^2

=> 225*(1.08)^2

=> $262.44

c) For the $300 received at the end of the fourth year, the details are as below

I = 300, r = 8% and n = 0 (i.e end of the fourth year only you receive).

Hence Future value of $300 at the end of fourth year is $300 only.

Now summing all together, the future value of the contract at the end of fourth year is $94.48 + $262.44 + $300

=> $656.92.