Carol just entered college Her grandparents have promised to give her $25,000 to

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 her 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 save $5000 each year starting next year

Explanation / Answer

Alternative 1:-25,000 at end of 4 years i 8% Year 0 1 2 3 4 Cashflows 25000 DCF 18375.75 PV 18375.75 Future worth 5 years from now 27000 Alternative 2:-5,000 at end of 2 years to 4 years and 5,000 at end of 5 years i 8% Year 0 1 2 3 4 5 Cashflows 5000 5000 5000 10000 After grduation 5000 extra SO 5000+5000 at end of year 5 DCF 4286.694 3969.161 3675.149 6805.832 FV AT END OF 5 YEARS 6298.56 5832 5400 10000 PV 18736.84 Future worth 5 years from now 27530.56 Number of years to acumulate 25000$ FV 25000 PV 0 I 8% Coupon 5000 Number of years taken to accumulate 25,000$ 6.64 Years Equivalent annual amount over a period of 5 years for second alternative as its cashflow if for 5 years FV 27530.56 PV 0 I 8% Coupon 4692.76 Equivalent annual amount over a period of 5 years Number of years taken 5

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