Question

Aunt Mabel promised to give you $5000 when you successfully complete your freshman year, $3000 when you successfully complete your sophomore year, $3000 when you successfully complete fin 300 your junior year, and $4000 when you successfully complete your senior year. Aunt Mabel made this promise when you graduated from High School and let's assume you go directly to the University of Illinois and graduate in four years.Aunt Mabel expects the interest rates to be 6.500% during your freshman year, 7.750% duringyour sophomore year, 4.500% during your junior year, and 2.500% during your senior year.If Aunt Mabel can predict interest rates with accuracy, she will deposit to her bank account____________.

Answer 1

$11,608

Step-by-step explanation:

We must calculate the present value of your Aunt's gifts using her predicted interest rates as variable discount rates:

present value of the $5,000 = $5,000 / 1.065 = $4,695

present value of the first $3,000 = ($3,000 / 1.065) / 1.0775 = $2,614

present value of the second $3,000 = [($3,000 / 1.065) / 1.0775] / 1.045 = $2,502

present value of $4,000 = {[($3,000 / 1.065) / 1.0775] / 1.045)} / 1.025 = $3,254

Aunt Mabel should deposit $11,608 in her bank account