CFA Practice Question

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CFA Practice Question

An individual deposits $1,000 today, $1,200 one year from today, and $1,500 two years from today into an interest-earning account. The deposits earn 10% compounded annually. Find the total accumulated amount in his account three years from today.
Correct Answer: $4,433.00

This is not an annuity, since the cash flows change every year. This uneven cash flow is a stream of annual single cash flows. Find the future value of each cash flow and then add them up. Notice that the payments are made at the beginning of each year. Notice that PMT1 earns interest for 3 years, PMT2 earns interest for 2 years, and PMT3 earns interest for 1 year.

We need to calculate the future value of the 3 investments separately and then add them together. We use the future value formula FVN = PV (1 + r)N

1,000 (1.1)3 + 1,200 (1.1)2 + 1,500 (1.1)1= 1,331 + 1,452 + 1,650 = 4,433.00

This is probably the best method to use, since the NPV functions will only give present value, not future value.

User Contributed Comments 15

User Comment
danlan We get NPV=3027.8, the the future value=NPV*1.1^4=4433
chuong Try it again
Co=1000, C1=1200, C2=1500, I=10 =>NPV=3330.57581 then PV=-33057581, I/Y=10, N=3 => FV = 4433
Rotigga Great tip, chuong!
julescruis nice one
thekapila well here is the correct way to do it.
C0 = -1000
C1 = -1200
C2 -1500
I - 10
CMPT NFV - 4433
StanleyMo This questions is tricky: you have in fact t=0, t=1, and t=2 bank in

but they want you to calculate the total amount at t =3 instead of t=2.

thats why we are using C1, C2 and C3 with the C1
= 1100 ( not 1000!, that is t=0)
TammTamm Thanks for the two step process chuong. Makes sense now.

2nd reset enter

2nd QUIT: 0.00

CF: CFo = previous value
2nd CLR WORK: CFo = 0.00
1000 ENTER: CFo = 1,000.00

DownArrow: C01 = 0.00
1200 ENTER: C01 = 1,200.00
DownArrow: F01 = 1.00

DownArrow: C02 = 0.00
1500 ENTER: C02 = 1500.00
DownArrow: F02 = 1.00

NPV: I = 0.00
10 ENTER: I = 10.00

DownArrow: NPV = 0.00

CPT: NPV = 3330.58

Thus PV = -3,330.58

CPT > FV = 4433.00
VT2010 can someone solve this one with hp12c please
regards vishal
ThanhBUI short cut possible only if identical rates
johntan1979 Throw away your HP12C
chipster got the same thing danlan.
jonan615 HP12C:

1000 [g][cf0]
1200 [g][cfj]
1500 [g][cfj]
10 [i][f][npv]
1.10 [enter]
3 [y^x]
[times] = 4432.99
coryrmoore Thanks Jonan
sshetty2 I didn't read the question properly, u actually have to calculate the nfv then add the interest for another yr
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