Question

Mike is planning to invest his savings in a savings account. He manages to deposit $1,000 at the end of the first year, $700 at the end of the second year, $1,500 at the end of the third year, and $600 at the end of the fourth year. If the account earns 7 percent interest each year, what is the terminal value of this uneven cash flow stream? (Round your answer to two decimal places.)

Answer 1

$ 4,231.47

Step-by-step explanation:

By terminal value, it means the value of savings deposit at the end of the fourth year bearing in mind the first deposit made at the end of year 1 would only earn interest in years 2,3 and 4 , the second deposit would interest in years 3 and 4 since it was made at the end of year 2 and so on .

Future value of deposits=deposit*(1+annual interest rate)^n

n is the number of years that the each deposit would earn interest

terminal value=$1,000*(1+7%)^3+$700*(1+7%)^2+$1500*(1+7%)^1+$600*(1+7%)^0

terminal value=$ 4,231.47