Question

Paradise, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1...

Paradise, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $625 2 $975 3 $1,100 4 $1,450 Required:

(a) If the discount rate is 10 percent, what is the future value of these cash flows in year 4?

(b) What is the future value at a discount rate of 20 percent?

(c) What is the future value at discount rate of 28 percent?

Homework Answers

Answer #1

(a) Present Value = $ 625 * 1/(1.10) ^ 1 + $ 975 * 1/(1.10) ^ 2 + $ 1,100* 1/(1.10) ^ 3 + $ 1,450 * 1/(1.10) ^ 4

= $ 3,190.78

Future Value =Present Value *( 1+ Rate of Interest /100) ^ Time

= $ 3,190.78 * ( 1+10/100)^ 4

= $ 4,671.62

Hence the correct answer is $ 4,671.62

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(b)

Present Value = $ 625 * 1/(1.20) ^ 1 + $ 975 * 1/(1.20) ^ 2 + $ 1,100* 1/(1.20) ^ 3 + $ 1,450 * 1/(1.20) ^ 4

= $ 2,533.76

Future Value =Present Value *( 1+ Rate of Interest /100) ^ Time

= $ 2,533.76* ( 1+20/100)^ 4

= $ 5,254.00

Hence the correct answer is $ 5,254.00

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(c)

Present Value = $ 625 * 1/(1.28) ^ 1 + $ 975 * 1/(1.28) ^ 2 + $ 1,100* 1/(1.28) ^ 3 + $ 1,450 * 1/(1.28) ^ 4

= $ 2,148.06

Future Value =Present Value *( 1+ Rate of Interest /100) ^ Time

= $ 2,148.06* ( 1+28/100)^ 4

= $ 5,766.15

Hence the correct answer is $ 5,766.15

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