Financial Management: Core Concepts, Third Edition

4.1 Future Value of Multiple Payment Streams

Suppose you plan to put away some money each year to build up a nest egg to use as a down payment on a house. You start off by putting away $2,000 today, and over the next three years, you are able to put away $3,000 at the end of the first year, $4,000 at the end of the second year, and $5,000 at the end of the third year. How much will you have saved by the end of the third year if your investment rate is 5% per year?

The time line in Figure 4.1 will help us visualize these cash flows. As before, we will use T as the variable that indicates time and the subscript on T to identify the specific time period. So T₀ will be today or time zero, T₁ will be the end of the first period (in this example, the ...