Time value of money question. Confused about t
Two years from now, a client will receive the first of three annual payments of $20,000 from a small business project. If she can earn 9 percent annually on her investments and plans to retire in six years, how much will the three business project payments be worth at the time of her retirement?
Fairly simple question but the wording on these gets me confused. The time never seemed to match up with what the question says.
I solved this using FV of N=3 to get 65,562. I then compounded another year to get 71,462.58. The book gives an answer of compounding the amount for another 2 years to get 77,894.21.
I just can’t understand with the wording of the question how that’s correct.
Starting at t=0, in 2 years the client will receive 20k. Meaning at the beginning of t=2, 20k will start compounding as an annuity. So from 2 to 3, 3 to 4, 4 to 5. We use those 3 years to compound the 20k deposits. At beginning of t=5, we should be left with 65,562. In 6 years from t = 0 is the time she would like to retire. Therefore, from t= 5 to t=6 we are looking to compound the money 1 more year, since In 6 years from t = 0 she is retiring.
Can anybody explain this to me like I’m 5 or something because it really does not make sense to me. For the most part I’m grasping everything but this does not make sense. Thanks
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