Question

11. Future Value of Uneven Cash Flow: You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $5,000 at the end of the first year and you anticipate that your annual savings will increase by 10% annually thereafter. Your expected annual return is 7%. How much will you have for a down payment at the end of Year 3?

Answer 1

$17,659

Step-by-step explanation:

The computation of the down payment at the end of year 3 is shown below:

= Annual cash flow × (1 + interest rate)^number of years + Annual cash flow × (1 + interest rate)^number of years + Annual cash flow

= $5,000 × (1 + 0.07)^2 + $5,500 × (1 + 0.07) + $6,050

= $5,000 × 1.1449 + $5,500 × 1.07 + $6,050

= $5724.5 + $5,885 + $6,050

= $17,659

The $5,500 and $6,050 is come after applying the 10% increment