Question

2. Ten annual payments are made into an investment account that pays 8% annual interest. The first payment of $15,000 occurs at the end of year 1 and subsequent payments increase by $5,000 each year. The money is then left in the account until the end of year 20.

1. What is the present value of the cash flows?
2. How much money is in the account at the end of year 20?

Answer 1

Answer A

Computation of present value of the cash flows

Years	Amount	Dicounting Factor @ 8%	Present value
	A	B	A*B
1	15,000.00	0.925926	13,888.89
2	20,000.00	0.857339	17,146.78
3	25,000.00	0.793832	19,845.81
4	30,000.00	0.735030	22,050.90
5	35,000.00	0.680583	23,820.41
6	40,000.00	0.630170	25,206.79
7	45,000.00	0.583490	26,257.07
8	50,000.00	0.540269	27,013.44
9	55,000.00	0.500249	27,513.69
10	60,000.00	0.463193	27,791.61
		Total =	230,535.38

So, PV of Cash Flow = $ 230,535.38

Answer B

Money is in the account at the end of year 20 = $ 230,535.38 * (1.08)^20

= $ 230,535.38 * 4.66096

= $ 1,074,516.18