Question

Will rate!

You are planning to withdraw $100 in Year 1, $150 in Year 3, and $200 in Year 5. How much should you invest today, at an interest rate of 5%? Draw a cash flow diagram for your understanding You need not submit the cash flow diagram Choose the most appropriate model using functional notations that will answer the question ap-100(P/F, 5% 1) +150P/F 5%, 2).200 pyp.5%3)

Answer 1

1.

Amount required to invest today is equal to present value of future cash inflows at interest rate. Present value can be calculated with following formula -

P = C₁(P/F,i%,1) + C₂(P/F,i%,2) + .............. Cn(P/F,i%,n)

Thus, to answer question use following model

P = 100(P/F,5%,1) + 150(P/F,5%,3) + 200(P/F,5%,5)

2.

Computation of Amount required to invest today.

Formula reference -

Thus, Amount required to invest today is 381.52