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25 December, 21:23

You will make the following investments for a trip around the world: $2,600 today, $4,000 at the end of year two, and $1500 at the end of year five. (A) How much will you have in six years if you can earn 4.2% on your investments? (B) What equivalent amount could you put away today as a lump sum and have the same amount in six years?

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  1. 25 December, 21:31
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    a) $9606.53

    b) $7505.16

    Explanation:

    Giving the following information:

    Investment

    $2,600 year 0

    $4,000 at the end of year two

    $1500 at the end of year five.

    i=0,42

    A) FV=2600 * (1,042^6) = $3328

    FV=4000 * (1,042^4) = $4715,53

    FV=1500 * (1,042^1) = $1563

    Total = $9606.53

    B) We need to find the present value of $9606.53

    PV = FV/[ (1+i) ^n]

    PV = 9606.53/1,042^6 = $7505.16
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