Questions 5-1 How can you add a cash flow in year two and a cash flow in year four in year seven?
To add cash flows, they need to be moved to the same time period. The cash flows in years two and four should be moved forward with interest to year seven, then they can be added together.
5-2 People can become millionaires in their retirement years quite easily if they start saving early in employer 401(k) or 403(b) programs (or even if their employers don’t offer such programs). Demonstrate the growth of a $250 monthly contribution for 40 years earning 9 percent APR.
Using equation 5-2, we have:
5-3 When you discount multiple cash flows, how does the future period that a cash flow is paid affect its present value and its contribution to the value of all the cash flows?
Discounting reduces a future cash flow to a smaller present value. Cash flows far into the future become very small when discounted to the present. Thus, cash flows...