Question

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?

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