Planning for the Future: Investment Strategy

a.) What is the cash flow diagram for the five years, assuming you want to withdraw all funds at the end of year? b.) What is the future value of all your "investments" at the end of year five?

Expert Answer: The future value of all your investments at the end of year five is approximately $40,964. a.) Here's the cash flow diagram for the five years: Year 1: +$10,000 (savings) Year 2: +$6,000 (savings) Year 3: $0 (washout) Year 4: +$15,000 (insurance check) Year 5: Withdrawal of all funds b.) To calculate the future value of all investments at the end of year five, we need to calculate the future value of each cash flow and then sum them up.

Cash Flow Diagram

Year 1: You saved $10,000 at the end of the first year.

Year 2: You saved $6,000 at the end of the second year.

Year 3: Unfortunately, there was no investment opportunity due to a car accident.

Year 4: You received a $15,000 insurance check for the car accident at the end of the fourth year.

Year 5: At the end of the fifth year, you decide to withdraw all funds.

Future Value Calculation

To calculate the future value of each cash flow, we use the formula:

FV = PV * (1 + r)^n

Where FV is the future value, PV is the present value, r is the interest rate per period, and n is the number of periods.

Calculations:

Year 1: $10,000 * (1 + 0.12)^4

Year 2: $6,000 * (1 + 0.12)^3

Year 3: $0 (No investment opportunity)

Year 4: $15,000 * (1 + 0.12)^1

Summing up the future values of all cash flows:

FV = ($10,000 * (1 + 0.12)^4) + ($6,000 * (1 + 0.12)^3) + $0 + ($15,000 * (1 + 0.12)^1)

FV = $10,000 * 1.5735 + $6,000 * 1.4049 + $0 + $15,000 * 1.12

FV ≈ $15,735 + $8,429 + $15,000 * 1.12

FV ≈ $15,735 + $8,429 + $16,800

Therefore, the future value of all your investments at the end of year five is approximately $40,964.