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James Horner is considering an investment scheme, to fund his house purchase after 6 years, with following...

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Finance

James Horner is considering aninvestment scheme, to fund his house purchase after 6 years, withfollowing cash deposits for a period of 6 years.

Year

1

2

3

4

5

6

Cash deposit ($)

10,000

12,000

14,000

16,000

18,000

20,000

  1. The rate of interest on the deposits is 9% per annum. If Jamesrequires an amount of $115,000 at the end of 6 years to purchasethe property, how much will be the shortfall or surplus of thisinvestment scheme? Show all the necessary calculations
  2. If the rate of interest increases to 11%, what will be thesurplus/shortfall
  3. What will be your answer for a) above, If James deposits at thebeginning of each year, instead of depositing at the end of theyear?

Answer & Explanation Solved by verified expert
4.2 Ratings (799 Votes)

Ans a)
Year Cash deposit ($) future value Formula
1 10000          15,386 =10000*(1+9%)^5
2 12000          16,939 =12000*(1+9%)^4
3 14000          18,130
4 16000          19,010
5 18000          19,620
6 20000          20,000
Future value        109,085
therefore shortfall = 115,000-109085        5,915
Ans b)
Year Cash deposit ($) future value Formula
1 10000          16,851 =10000*(1+11%)^5
2 12000          18,217 =12000*(1+11%)^4
3 14000          19,147
4 16000          19,714
5 18000          19,980
6 20000          20,000
Future value        113,908
therefore shortfall = 115,000-113908        1,092
Ans C)
Year Cash deposit ($) future value Formula
1 10000          16,771 =10000*(1+9%)^6
2 12000          18,463 =12000*(1+9%)^5
3 14000          19,762
4 16000          20,720
5 18000          21,386
6 20000          21,800
Future value        118,903
therefore surplus =118903- 115,000        3,903
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