Amy Monroe wants to create a fund today that will enable her to withdraw $25,000 per year for 8 years, with the first withdrawal to take place 5 years from today. If the fund earns 8% interest, how much must Amy invest today

$114,047

Explanation:

We are required to find the amount to be Invested today (Present Value)

Summary of the Cashflows are :

Year 0  =             $0

Year 1   =             $0

Year 2  =             $0

Year 3  =             $0

Year 4 =              $0

Year 5  =  $25,000

Year 6   = $25,000

Year 7  =   $25,000

Year 8   = $25,000

Year 9   = $25,000

Year 10   = $25,000

Year 10   = $25,000

Year 10   = $25,000

Manually

We can calculate the Net Present Value by discounting each individual payment at their appropriate period and adding up the totals to arrive at the Present Values.

PV = FV / ( 1 + R) ^ n

Where,

FV = the future cash flow stream ($25,000)

R = interest rate 8%

n = year (n = 5 for the first payment)

Financial Calculator

Alternatively we can calculate this using the CF Function of the Financial calculator as follows :

$ 0            = CFj

4               = Nj

$25,000  = CFj

8               = Nj

Shift NPV = $114,047

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