You need 28,974 at the end of 10 years, and your only investment outlet is an 8% long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.

1. what single payment could be made at the beginning of the first year to achieve this objective?

2. What amount could you pay at the end of each year annually for 10 years to achieve this same objective.

Lynn

1)
Present value of future cash flows = Future cash flow * PV factor @8% for 10 years
= 28,974 * 0.463
= 13,415
2)
Present value cash flows of an annuity * PV factor for an annuity @8% for 10 years = Future value
Present value cash flows of an annuity = 28,974/6.710
= $4,318

you need 28,974 at the end of 10 years, and your only investment outlet is an 8% long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.

1. what single payment could be made at the beginning of the first year to achieve this objective?

2. What amount could you pay at the end of each year annually for 10 years to achieve this same objective.

Lynn
I am really starting to understand the concepts. However, the question about future cash flows.. I am not understanding how these numbers are correct when the person is wanting 29,974.. When they are putting away 4,318 at the end of each year, for ten years.. that comes out to 43180.. maybe you could assist, as I am having difficulty grasping this concept.. Thanks a bunch.. I am guessing that I'm reading this wrong or I'm missing something here.. I am very confused as is about accounting...

Candy

the correct answer is as follows:

Present value cash flows of an annuity * FV factor for an annuity @8% for 10 years = Future value
Present value cash flows of an annuity = 28,974/14. 487
= $2,000

2000 each year deposited will earn return @8% and will accumulate to 28,974

Hi there -

Where did you get 14.487... Is this the answer to the second question that was posted on the first post? I am still confused and do not understand how this formula..

Many thanks!

14.487 is the table value for compounding factor @ 8% for 10 years.