Question 3 Consider the cash flow series shown below Determi

Question 3 Consider the cash flow series shown below. Determine the required annual deposits (end of year) that will generate the cash flows from years 4 to 7, Assume the interest rate is 10%, compounded annually. (10 marks) $1400 $1600 $1000 $1200 Years

Solution

Present worth (PW) of given cash flows ($) = 1,000 x P/F(10%, 4) + 1,200 x P/F(10%, 5) + 1,400 x P/F(10%, 6) + 1,600 x P/F(10%, 7) =

= 1,000 x 0.6830** + 1,200 x 0.6209** + 1,400 x 0.5645** + 1,600 x 0.5132**

= 683 + 745.08 + 790.3 + 821.12

= 3,039.50

Therefore,

A = PW / P/A(10%, 7) = $3,039.5 / 4.8684** = $624.33

**From P/F and P/A Factor tables