Question

8. 8.

If you are planning to invest about $8000 to buy some school bus that have an interest of 12%

and have a life value of 4 years, and with cash flow of $1,500 in the 1st year; $2,000 on the 2nd

year; $3,000 on the 3rd year; and $4000 in the 4th year.

What is the future value of that investment?

Answer 1

If a person invests a certain amount in year 0 then the amount invested at the year 0 will be compounded for 4 years because the life value of an investment is 4 years. Similarly the cash flow for each subsequent year will be compounded by subtracting 1 year from the compounding value which is is mentioned in the below table :-

FV = Cash Flow (1+i)^n-t

Where,

i = interest rate

n = number of period

t = Cash flow occurring at the time t .

So for the year 1 , n = 4-1=3

Year	Cash flow	FV factor	Future Value of CF
0	8000	1.573	12588
1	1500	1.404	2107
2	2000	1.254	2508
3	3000	1.12	3360
4	4000	-	4000
FV of cash flows (Total)	-	-	24563