Question

Flows Wells, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash flows in Year 4? What is the future value at an interest rate of 11 percent? At 24 percent?

Year Cash Flow: 1 $865 2 1,040 3 1,290 4 1,385

3. Future Value and Multiple Cash Flows Wells, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash flows in Year 4? What is the future value at an interest rate of 11 percent? At 24 percent? Year Cash Flow $ 865 1,040 1,290 1,385

Answer 1

Interest Rate	Future Value
8%	$5,080.91
11%	$5,281.28
24%	$6,232.93

What is the future value at an interest rate of 8 percent?

Answer: $ 5,080.91

Formula for calculating the future value is

N = Number of reinvestment period

Future value calculating for all the cash flows

Year	Cash Flow	Working	Future Value
1	$865	$865 * (1+.08)3	$ 1,089.65
2	$1040	$1040 * (1+.08)2	$ 1,213.06
3	$1290	$1290 * (1+.08)1	$ 1,393.20
4	$1385	$1385	$ 1,385.00
Future value of investment	$ 5,080.91

Note:

It is assumed that cash flows are received at the end of each year.

For year 1 cash flows since it is received at the end of the 1st year, reinvestment period will be 3 years.

For year 2 cash flow since it is received at the end of 2nd year, reinvestment period will be 2 years.

For year 3 cash flow since it is received at the end of 3rd year, reinvestment period will be 1 year.

For year 4 cash, which is received at the end of 4th year there is no reinvestment.

What is the future value at an interest rate of 11 percent?

Answer: $5,281.28

Formula for calculating the future value is

N = Number of reinvestment period

Future value calculating for all the cash flows

Year	Cash Flow	Working	Future Value
1	$865	$865 * (1+.11)3	$1,183.00
2	$1040	$1040 * (1+.11)2	$1,281.38
3	$1290	$1290 * (1+.11)1	$1,431.90
4	$1385	$1385	$ 1,385.00
Future value of investment	$5,281.28

Note:

It is assumed that cash flows are received at the end of each year.

For year 1 cash flows since it is received at the end of the 1st year, reinvestment period will be 3 years.

For year 2 cash flow since it is received at the end of 2nd year, reinvestment period will be 2 years.

For year 3 cash flow since it is received at the end of 3rd year, reinvestment period will be 1 year.

For year 4 cash, which is received at the end of 4th year there is no reinvestment.

What is the future value at an interest rate of 24 percent?

Answer: $6,232.93

Formula for calculating the future value is

N = Number of reinvestment period

Future value calculating for all the cash flows

Year	Cash Flow	Working	Future Value
1	$865	$865 * (1+.24)3	$1,649.23
2	$1040	$1040 * (1+.24)2	$1,599.10
3	$1290	$1290 * (1+.24)1	$1,599.60
4	$1385	$1385	$ 1,385.00
Future value of investment	$6,232.93

Note:

It is assumed that cash flows are received at the end of each year.

For year 1 cash flows since it is received at the end of the 1st year, reinvestment period will be 3 years.

For year 2 cash flow since it is received at the end of 2nd year, reinvestment period will be 2 years.

For year 3 cash flow since it is received at the end of 3rd year, reinvestment period will be 1 year.

For year 4 cash, which is received at the end of 4th year there is no reinvestment.