John and Marsha are in an argument about an investment which requires a series of six annual deposits. If an investor decides to invest, he/she has to deposit $30,000 at the end of year 1, $30,000 at the end of year 2, $30,000 at the end of year 4, $30,000 at the end of year 5, $30,000 at the end of year 6 and $30,000 at the end of year 7. The deposited amounts grow at a rate of 5% p.a. The argument is about the nature of the cash flow stream of the six deposits – whether the cash flows are an annuity or a mixed stream. As per John's opinion, the value of this investment at the end of year 7 will be $244,260.25 while Marsha thinks that the value of this investment at the end of year 7 will be $207,795.07. You are required to assist both in coming to a resolution of the argument by doing as follows: i) As per your own understanding of the cash flow pattern of deposits presented above, compute the value of the investment at the end of year 7. Clearly highlight all computational steps. ii) Clearly indicate who, amongst John and Marsha, is conceptually correct in terms of the type of cash flow stream and why? If you feel that the cash flow stream is an annuity, state your reasons. If you think it is a mixed stream, state your reasons.
John and Marsha are in an argument about an investment which requires a series of six annual deposits. If an investor decides to invest, he/she has to deposit $30,000 at the end of year 1, $30,000 at the end of year 2, $30,000 at the end of year 4, $30,000 at the end of year 5, $30,000 at the end of year 6 and $30,000 at the end of year 7. The deposited amounts grow at a rate of 5% p.a. The argument is about the nature of the cash flow stream of the six deposits – whether the cash flows are an annuity or a mixed stream. As per John's opinion, the value of this investment at the end of year 7 will be $244,260.25 while Marsha thinks that the value of this investment at the end of year 7 will be $207,795.07. You are required to assist both in coming to a resolution of the argument by doing as follows: i) As per your own understanding of the cash flow pattern of deposits presented above, compute the value of the investment at the end of year 7. Clearly highlight all computational steps. ii) Clearly indicate who, amongst John and Marsha, is conceptually correct in terms of the type of cash flow stream and why? If you feel that the cash flow stream is an annuity, state your reasons. If you think it is a mixed stream, state your reasons.
Chapter5: Gross Income: Exclusions
Section: Chapter Questions
Problem 43P
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Transcribed Image Text:John and Marsha are in an argument about an investment which requires a series of six annual
deposits.
If an investor decides to invest, he/she has to deposit $30,000 at the end of year 1, $30,000 at the
end of year 2, $30,000 at the end of year 4, $30,000 at the end of year 5, $30,000 at the end of
year 6 and $30,000 at the end of year 7. The deposited amounts grow at a rate of 5% p.a.
The argument is about the nature of the cash flow stream of the six deposits - whether the cash
flows are an annuity or a mixed stream. As per John's opinion, the value of this investment at the
end of year 7 will be $244,260.25 while Marsha thinks that the value of this investment at the
end of year 7 will be $207,795.07.
You are required to assist both in coming to a resolution of the argument by doing as follows:
i) As per your own understanding of the cash flow pattern of deposits presented above, compute
the value of the investment at the end of year 7. Clearly highlight all computational steps.
ii) Clearly indicate who, amongst John and Marsha, is conceptually correct in terms of the type
of cash flow stream and why? If you feel that the cash flow stream is an annuity, state your
reasons. If you think it is a mixed stream, state your reasons.
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