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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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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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... 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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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 appears to me that if one wants to make progress in mathematics, one should study the masters and not the pupils. - Niels Henrik Abel.
Nothing is better than reading and gaining more and more knowledge - Stephen William Hawking.
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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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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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