   Chapter 5, Problem 33P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

FV 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?

Summary Introduction

To calculate: Amount of down payment at the end of three years.

Future Value of Cash Flow: If single cash flow put in an investment today which pays us compound interest how much does it grow over the period of time is known as future value of cash flow.

Explanation

Formula to calculate future value of cash flow is,

FVN=PV(1+I)N

Where,

• FVN is the future value.
• PV is the present value.
• I is the interest rate.
• N is the compounding period.

To calculate amount of down payment at the end of 3 years

 Year Present value (A) Future Value @7% (B) FV (A×B) 2 5,000 (1+0.07)2 5,724.5 1 5500 (1+0.07)1 5,885 0 6050 - 6,050 Total down payment at the end of 3 years 17659

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