Question

Assume that the investment is financed by a bank loan and the loan is paid off as the investment generates net cash flows. When the loan is repaid the cash flows that continue to be produced by the investment are paid into a deposit account at the bank. If the bank pays interest on the deposit at 9 percent determine how much can be expected to be held in the deposit account at the end of year 4?

Answer 1

To determine the amount held in the deposit account at the end of year 4, calculate the future value of the cash flows generated by the investment. Using the formula for future value of a cash flow series, the amount held in the deposit account is $12,861.05.

Step-by-step explanation:

To determine how much can be expected to be held in the deposit account at the end of year 4, we need to calculate the future value of the cash flows generated by the investment. In this case, the investment is financed by a bank loan and the loan is paid off as the investment generates net cash flows.

Let's assume that the net cash flows generated by the investment at the end of each year are $10,000.

Using the formula for future value of a cash flow series, FV = CF * ((1 + r)^n - 1) / r, where FV is the future value, CF is the cash flow, r is the interest rate, and n is the number of periods, we can calculate the future value of the cash flows at the end of year 4.

Plugging in the values, FV = $10,000 * ((1 + 0.09)^4 - 1) / 0.09 = $12,861.05.