What is the future value of an investment which compounds an

What is the future value of an investment which compounds annually at 8% and starts at $1,000/year and grows by 10% per year for 20 years (starting with the second year)? What is the Present Value of a $12,000 inflow 2 years from now, and a $40,000 inflow 6 years from now and a $30,000 outflow 4 years from now. Assume an interest rate of 6% for years 1 and 2, 8% for years 3 and 4 and 10% for years 5 and 6. Assume annual compounding.

Solution

11)

Future value of growing annuity = P×[(1+r)^n-(1+g)^n]÷(r-g)

P is first payment

r is interest rate per period

n is number of payments

g is growth rate

= $1,000×[(1+8%)^20-(1+10%)^20]÷(8%-10%)

= $103,327.14