Carol just entered college. Her grandparents have promised to give her $25,000 t
ID: 1197695 • Letter: C
Question
Carol just entered college. Her grandparents have promised to give her $25,000 toward a new car if she graduates in 4 years. Alternatively, if she takes 5 years to graduate, they offered her $5000 each year starting after her second year is complete and an extra $5000 when she graduates. Draw the cash flow diagrams first. Then, use i = 8% per year to show Carol how to use spreadsheet functions to determine the following for each gift hex grandparents offered: Present worth P now Future worth F five years from now Equivalent annual amount A over a total of 5 years Number of years it would take Carol to have $25,000 in hand for the new car if she were able to saw $5000 each year starting next year.Explanation / Answer
a. Cash flow for Carol
2nd year = 5000
3rd year= 5000
4th Year- 5000
5th Year = 10000
Hence, PV= 5000/(1.08^2) + 5000/(1.08^3) + .... + 10000/(1.08^5))
PV= 18820
b. FV= 5000 ( 1.08^3) + 5000 ( 1.08^2) + ....+ 10000
Hence, FV= 27530.56
c.
18820 = x/1.08 + x/(1.08^2) + ... + x/1.08^5
Solving for x we get, X= 4713.59
Hence, Equivalent annual amount = 4713.59