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Wells, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $ 865 2 1,040 3 1,290 4 1,385 a. If the discount rate is 8 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the future value at an interest rate of 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the future value at an interest rate of 24 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Respuesta :

Answer:

Future value is calculated using the formula:

FV = PV*(1+r)n

FV = Future value, PV = Present vlaue, r = interest rate

C1 = 865, C2 = 1040, C3 = 1290, C4 = 1385

FV of C1 at t:4 = C1*(1+r)3

FV of C2 at t:4 = C2*(1+r)2

FV of C3 at t:4 = C3*(1+r)1

FV of C4 at t:4 = C4*(1+r)0 = C4

Future value is the sum of Future values of all the cash flows

Future value = C1*(1+r)3 + C2*(1+r)2 + C3*(1+r)1 + C4

a. When discount rate = r = 8%

Future value = C1*(1+r)3 + C2*(1+r)2 + C3*(1+r)1 + C4 = 865*(1.08)3 + 1040*(1.08)2 + 1290*(1.08)1 + 1385

Future value = 1089.65088 + 1213.056 + 1393.2 + 1385 = 5080.90688

b. When Discount rate = r = 11%

Future value = C1*(1+r)3 + C2*(1+r)2 + C3*(1+r)1 + C4 = 865*(1.11)3 + 1040*(1.11)2 + 1290*(1.11)1 + 1385 = 1183.000815 + 1281.384 + 1431.9 + 1385 = 5281.284815

c. When discount rate = r = 24%

Future value = C1*(1+r)3 + C2*(1+r)2 + C3*(1+r)1 + C4 = 865*(1.24)3 + 1040*(1.24)2 + 1290*(1.24)1 + 1385

Future value = 1649.22976 + 1599.104 + 1599.6 + 1385 = 6232.93376

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