Question

You put $100 in the bank now, $200 in the bank a year from now, and $300 in the bank in two years. How much money will you have available 3 years from now if you earn a 7.5% rate of interest? (Calculate the future value of this stream of cash flows. Refer to Example 5.6.)

Answer 1

End of year 3: $677.85

Explanation:

If the interest rate is annual effective:

Year 0 (now): $100

In a year from now I will have:

End of Year 1: $100*1,075= 107.5

Then I put $200 more, i will have $307.5

Begging of year 2: $307.5

In two years from now I will have:

End of year 2: $307.5*1.075= $330.56

Then I put $300 more, i will have $660.56

Begging of year 3: $660.56

In three years from now i will have:

$660.56*1,075= $677.85

End of year 3: $677.85