An investment will pay $100 at the end of each of the next 3 years, $200 at the

Question

An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. [CLARIFICATION OF TIMING: "at the end of Year 4" means 4 years from today, "at the end of Year 5" means 5 years from today, and so on.]

NOTE: Do not round any intermediate figures before reaching your final answers to each of parts a and b.

a. If other investments of equal risk earn 11% annually, what is its present value? Round your answer to the nearest cent.


Can you explain how to find this on a BA II 2 Plus financial calculator?

Explanation / Answer

Here's the Present Value Calculation:

Year 1 $100 / (1.0 + .11) = $ 90.09
Year 2 $100 / (1.0 + .11)^2 = $ 81.16
Year 3 $100 / (1.0 + .11)^3 = $ 73.12
Year 4 $200 / (1.0 + .11)^4 = $131.75
Year 5 $300 / (1.0 + .11)^5 = $178.04
Year 6 $500 / (1.0 + .11)^6 = $267.32

Total PV = $821.47 (This was rounded at the end of the calculations)

Here's the Future Value calculation:
(Note: since the payment is at the end of each year, the payment for year 1 will compound for only 5 years, the payment for year 2 will compound for 4 years, and so on)

Year 1 $100 X (1.0 + .11)^5 = $168.51
Year 2 $100 X (1.0 + .11)^4 = $151.81
Year 3 $100 X (1.0 + .11)^3 = $136.76
Year 4 $200 X (1.0 + .11)^2 = $246.42
Year 5 $300 X (1.0 + .11)^1 = $333.00
Year 6 $500 X (1.0 + .11)^0 = $500.00

Total FV = $1,536.50 (This was rounded at the end of the calculations)

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