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#1 2005-11-13 09:41:44

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

Compound Interest

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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#2 2005-11-13 13:27:58

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

Re: Compound Interest

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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#3 2005-11-13 17:44:28

MathsIsFun
Administrator
Registered: 2005-01-21
Posts: 7,535

Re: Compound Interest

... 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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#4 2005-11-13 20:22:58

ganesh
Moderator
Registered: 2005-06-28
Posts: 13,593

Re: Compound Interest

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?


Character is who you are when no one is looking.

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#5 2005-11-14 16:11:09

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

Re: Compound Interest

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?? sad

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#6 2005-11-14 17:21:58

MathsIsFun
Administrator
Registered: 2005-01-21
Posts: 7,535

Re: Compound Interest

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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