Question

1. You deposit $2000, $3000, and $4000 respectively at the end of years 1,2, and 3 from today in a mutual fund providing 10% return. Draw a timeline and compute how much your savings will be worth in 3 years.

2. Patricia starts college in 5 years for which she will need $15,000 payable at the end of each of the 4 years. Suppose she can buy an annuity in 5 yrs. that will enable her to make the four $15,000 annual payments. Draw a timeline for all cash flows. What will be the cost of the annuity 5 years from today? What is the most she should be willing to pay for it if purchased today? Assume an interest (discount) rate of 6% during these 9 years.

Answer 1

1)

Year	Cash flows	FVIF@10%	Future value
0	$                       -	1.331	$                                    -
1	$                2,000	1.210	$                       2,420.00
2	$                3,000	1.100	$                       3,300.00
3	$                4,000	1.000	$                       4,000.00
Worth in 3 years			$     9,720.00