You just graduated, and you plan to work for 10 years and then to leave for the Australian "Outback" bush country.You figure you can save R1,000 a year for the first 5 years and R2,000 a year for the next 5 years.These savings cash flows will start one year from now.In addition, your family has just given you a R5,000 graduation gift.If you put the gift now, and your future savings when they start, into an account which pays 8 percent compounded annually, what will your financial "stake" be when you leave for Australia 10 years from now?

Question

Quizplus · Accepted Answer

To calculate the financial stake, we need to calculate the future value of the graduation gift and the savings cash flows. We will use the formula for the future value of an annuity and the future value of a lump sum:

Future Value = Present Value x (1 + r)^n, where r is the interest rate and n is the number of years.

Future value of graduation gift = R5,000 x (1 + 0.08)^10 = R10,793.84
(Note: We use 10 years instead of 9 because the graduation gift is invested now, not in 1 year)

Future value of savings cash flows for the first 5 years:
R1,000 x [(1 + 0.08)^5 - 1]/0.08 = R6,386.85

Future value of savings cash flows for the next 5 years:
R2,000 x [(1 + 0.08)^5 - 1]/0.08 = R13,958.32

Total future value = R10,793.84 + R6,386.85 + R13,958.32 = R31,138.01

Therefore, the best choice is D) R31,148.

You Just Graduated, and You Plan to Work for 10