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**Nick014****Member**- Registered: 2005-11-13
- Posts: 1

Im having issues with this compund interest problem.

A person will receive $5000 now, $5000 three years from now, and $5000 four years from now. If you assume a annual interest rate of 6%, what is the total present value of this cash flow?

Thanks in advance.

-Nick

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**Flowers4Carlos****Member**- Registered: 2005-08-25
- Posts: 106

hi yaz nick!!

hmmm... i'm not too sure how to compute compund interest but this is how i would do it:

use the compund interest formula:

A = P(1 + r/n)^(nt)

where t is in years, P is principal invested, and r is annual interest compunded n times per year.

our initial investment (P) is $5000, the interest is r=.06 compunded annually n=1, and t=3 (because we will be receiving more money after three years). plug these guys into the formula:

5000(1 + .06/1)^(1*3) = 5955.08

after three years, we will receive $5000 more so add that to 5955.08 which gives us 10955.08. we use the formula again but this time taking P=10955.08 and t=1.

10955.08(1+.06)^(1) = 11612.38

in the fourth year, we will receive an aditional $5000 so the total present value is:

11612.38 + 5000 = 16612.38

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**MathsIsFun****Administrator**- Registered: 2005-01-21
- Posts: 7,608

... then bring that back to present time by:

16612.38 / (1+.06)^4 = 13158.56

Does that make sense?

"The physicists defer only to mathematicians, and the mathematicians defer only to God ..." - Leon M. Lederman

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**ganesh****Moderator**- Registered: 2005-06-28
- Posts: 20,357

Present Value = 5,000 + 5,000/(1.06^3) + 5,000/(1.06^4)

= 13,158.46

This is done by using the formula

A = P*(1 + r/100)^n

Since the interest is compounded annually, r =6 and n=0, 3 and 4.

Therefore,

P = A/(1 + r/100)^n

Is that clear?

It is no good to try to stop knowledge from going forward. Ignorance is never better than knowledge - Enrico Fermi.

Nothing is better than reading and gaining more and more knowledge - Stephen William Hawking.

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**Flowers4Carlos****Member**- Registered: 2005-08-25
- Posts: 106

ohhh... so that's what "total present value" is. my mistake.

btw... why hasen't n e one said something nice bout my avatar?? u guys don't like it??

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**MathsIsFun****Administrator**- Registered: 2005-01-21
- Posts: 7,608

I like it ...

And I noticed it ...

Just hadn't mentioned it ...

Now, who is it ... ?

"The physicists defer only to mathematicians, and the mathematicians defer only to God ..." - Leon M. Lederman

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