Question

4-1 Using a time line The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $25,000 and is expected to result in cash inflows of $3,000 at the end of year 1, $6,000 at the end of years 2 and 3, $10,000 at the end of year 4, $8,000 at the end of year 5, and $7,000 at the end of year 6. a. Draw and label a time line depicting the cash flows associated with Starbuck Industries' proposed investment. b. Use arrows to demonstrate, on the time line in part a, how compounding to find future value can be used to measure all cash flows at the end of year 6. c. Use arrows to demonstrate, on the time line in part b, how discounting to find present value can be used to measure all cash flows at time zero. d. Which of the approaches-future value or present value-do financial man- agers rely on most often for decision making? Why?

Answer 1

ine (a Time -$a500 $3000 $6000 $6000 #10, 000 $8000 $7000 3 ear End C Componnding to Tutre alue Compounding Fu ture value 6000 6o000 DO0 go00 S O00 3000 6 4 Present Value Dis Caun fing Financial anagers relymore Present Picalry begining value approach because they deci ssions the make at of a pasect