Question

2. Havana, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent for the first 2 years and 4% for the years after year 2, what is the future value of these cash flows in Year 4? What is the future value of the cash flows in year 10? What is the present value of the cash flows?

Year	Cash Flow
1	$1,075
2	$1,235
3	$1,510
4	$1,965

Answer 1

1. FV of cash flows at year 4

Year	Cashflow	compounding factor	FV
1	1075	1.08 × 1.04 × 1.04 = 1.1681	1255.71
2	1235	1.04 × 1.04 = 1.0816	1335.78
3	1510	1.04	1570.40
4	1965	1	1965.00
		Total FV at year 4	6126.89

Future value at year 4 = $ 6,126.89

2. Future value at year 10.

= 6126.89 × (1.04)⁶

= 6126.89 × 1.26532

= $ 7,752.47

3.Present value

Year	Cashflow	discounting factor	PV
1	1075	0.92593	995.37
2	1235	0.85734	1058.81
3	1510	0.82436	1244.78
4	1965	0.79266	1557.58
		Total PV at year 0	4856.54

Present value at year 0 = $ 4,856.55