I plan to work for 10 years, quit my job and then travel the world. I save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years. These savings cash flows will start one year from now. I received a $5,000 gift. If I put the gift now, and the future savings when they start, into an account which pays 8 percent compounded annually, what will my financial "stake" be when I begin travel 10 years from now?
The formula of future value is:
Future Value = Present value * (1+interest rate)^(Years to maturity)
In this case, for the 5000 gift:
we input PV = 5000
interest rate = 8%
Number of years = 10
then by a financial calculator, or EXCEL "=-FV(8%,10,,5000)",
we can compute FV = ...
The solution examines the cash flow and interest rate for a job.