You expect to save $5,000 a year for the first 5 years and $10,000 annually for the following 5 years, with the first deposit being made a year from today

Business Oct 06, 2020

You expect to save $5,000 a year for the first 5 years and $10,000 annually for the following 5 years, with the first deposit being made a year from today. In addition, your grandfather just gave you a $20,000 graduation gift which you will deposit immediately. If the account earns 8% compounded annually, what how much will you have when you start your business 10 years from now?

Expert Solution

Make the annual cash flows first:
Year Cash Flow Compounding Factor
1 20000 (1+8%)^10
2 5000 (1+8%)^9
3 5000 (1+8%)^8
4 5000 (1+8%)^7
5 5000 (1+8%)^6
6 5000 (1+8%)^5
7 10000 (1+8%)^4
8 10000 (1+8%)^3
9 10000 (1+8%)^2
10 10000 (1+8%)^1
11 10000 (1+8%)^0

Multiply the cash flow and compounding factor to get the money available at the end of 10 years from now. The amount will be $144,944.32

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