Perhaps your ambition is to buy a sailboat; something like a 40-foot Benet au would fit the bill...

Perhaps your ambition is to buy a sailboat; something like a 40-foot Benet au would fit the bill very well. But that means some serious saving. You estimate that, once you start work, you could save $20,000 a year out of your income and earn a return of 8% on these savings. How much will you be able to spend after five years? We are looking here at a level stream of cash flows—an annuity. We have seen that there is a shortcut formula to calculate the present value of an annuity. So there ought to be a similar formula for calculating the future value of a level stream of cash flows. Think first how much your savings are worth today. You will set aside $20,000 in each of the next five years. The present value of this five-year annuity is therefore equal to

PV =$20,000 X 5-year annuity factor

=$20,000 X [1/.08 – 1/.08(1.08)⁵] = $79,854

Now think how much you would have after five years if you invested $79,854 today. Simple! Just multiply by (1.08)5:

Value at end of year 5 =$79,854 X1.08⁵ =$117,332

You should be able to buy yourself a nice boat for $117,000.