Instructions: You are required to show the following 4 steps for each problem :

Question

Instructions:

You are required to show the following 4 steps for each problem : (i) Develop the timeline (linear representation of the timing of cash flows) (ii) Identify the time value of money variable (PV, FV, PMT, N or Rate) which needs to be calculated in the question. (iii) Identify the values of the remaining four variables (PV, FV, PMT, N or Rate) from the question. Be sure to input positive or negative signs. (iv) Calculate the correct value of the variable identified in step (ii)

5. How much money do you need to place into a bank account that pays a 3.2% rate in order to have $800 at the end of 6 years? Round to two decimal places.

Explanation / Answer

PV=?
rate =0.032
FV=+800

N=6

PMT=0 (since it is a one time cash outflow)

Now Using calculator or excel:
=PV(0.032,6,0,800)

=-$662.23 ( The sign is minus because it is an outflow)

Cash flow for years is the interest received each year

Year 0 1 2 3 4 5 6 Cash flow $       -662.23 $     21.19 $    21.87 $    22.57 $    23.29 $    24.04 $    24.81 Amount of investment $        662.23 $   683.43 $ 705.30 $ 727.87 $ 751.16 $ 775.19 $ 800.00

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