Question

Part C – Future and Present Values of Cash Flows and Lump Sums

The following information is for solving Questions 20 to 23

To save for $2,500 in five years for a Caribbean vacation, one must save different amounts, depending on the frequency of the payments.   Assuming one was contributing to a Tax-Free Savings Account (TFSA) that is paying a 3 percent rate of return, what would be required payments based on the following scenarios.

Question 20

One deposit (lump sum) at 3 percent that is compounded annually?

Question 20 options:

	$2,380.95
	$2,427.18
	$2,156.52
	$1,958.82
	None of the Above

Question 21

Monthly Payments, with 3 percent that is compounded monthly? (Remember payments are made at the BEGINNING of the Payment Period)

Question 21 options:

	$38.58
	$496.27
	$204.97
	$36.61
	None of the Above

Question 22

Biweekly Payments (26 payments per year), with 3 percent that is compounded biweekly? (Remember payments are made at the BEGINNING of the Payment Period)

Question 22 options:

	$30.61
	$17.82
	$16.91
	$29.68
	None of the Above

Question 23

Annually Payments, with 3 percent that is compounded annually? (Remember payments are made at the BEGINNING of the Payment Period)

Question 23 options:

	$785.27
	$457.17
	$430.89
	$755.26
	None of the Above

Answer 1

Question 20 One deposit (lump sum) at 3 percent that is compounded annually?

Future value required = Deposit * (1 + Interest)^Years

2500 = Deposit * (1 + 0.03)^5

Deposit required now = 2500 / 1.15927

Deposit required now = $2156.52 Option C

Question 21 Monthly Payments, with 3 percent that is compounded monthly? (Remember payments are made at the BEGINNING of the Payment Period)

Monthly Interest = Annual Interest /12 = 3%/12 = 0.25%

Number of payment periods = 5 Years * 12 Months = 60

Future value required = Monthly Deposit * Future value annuity due factor (3%/12,60)

2500 = Monthly Deposit * 64.8083

Monthly Deposit = 2500 / 64.8083 = $38.58 Option A

Question 22 Biweekly Payments (26 payments per year), with 3 percent that is compounded biweekly? (Remember payments are made at the BEGINNING of the Payment Period)

Biweekly Interest = Annual Interest /26 = 3%/12 = 0.1153%

Number of payment periods = 5 Years * 26 Payments = 130

Future value required = Bi weekly Deposit * Future value annuity due factor (0.1153%,130)

2500 = Bi weekly Deposit * 140.3310

Bi weekly Deposit = 2500 / 140.3310 = $17.82 Option B

Question 23

Annually Payments, with 3 percent that is compounded annually? (Remember payments are made at the BEGINNING of the Payment Period)

Future value required = Annual Deposit * Future value annuity due factor (3%,5)

2500 = Annual Deposit * 5.4684

Bi weekly Deposit = 2500 / 5.4684 = $457.17 Option B

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