Financial Technology Center - School of Business - Central Connecticut State University

You just graduated from CCSU, and you plan to work for 10 years and then to leave for the Australian “Outback” bush country. You figure you can save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years. These savings cash flows will start one year from now. In addition, your family has just given you a $5,000 graduation gift. If you put the gift now, and your future savings when they start, into an account that pays 8 percent compounded annually, what will your financial “stake” be when you leave for Australia 10 years from now?


Financial calculator solution.
We could solve this problem by finding the FV of each of these cash flows individually and then summing the results. However, that is the hard way. Instead, we will use the NPV function.

This function is defined as:

NPV ( Rate, Cash Flow at t=0, {Cash Flow at t=1 , Cash Flow at t=2 , Cash Flow at t=3 ,Cash Flow at t=4 , ........})

Calculate PV of the cash flows, then bring them forward to FV using the interest rate.

Inputs:
NPV ( 8, 5000 , { 1000 , 1000 , 1000, 1000, 1000, 2000, 2000, 2000, 2000, 2000})= $14,427.45

Second step .
Inputs:
N= 10 * 1.
I= 8 /1 .
PV= -14,427.45 .
PMT=0

Output: FV = $31,147.79