Question

Consider the following cash flows: Year Cash Flow $ 21,500 39,500 57,500 Assume an interest rate of 8.3 percent per year. a. If today is Year O, what is the future value of the cash flows five years from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. If today is Year O, what is the future value of the cash flows ten years from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Value in five years b. Value in ten years

Answer 1

a). Value in 5 years = $\sum_{t=1}^{n}$ [CF_t * (1 + r)^{(n - t)}]

= [$21,500 * (1 + 0.083)^(5-2)] + [$39,500 * (1 + 0.083)^(5-3)] + [$57,500 * (1 + 0.083)^(5-5)]

= $27,310.13 + $46,329.12 + $57,500 = $131,139.25

b). Value in 10 years = Value in 5 years * (1 + r)^{(10 - 5)}

= $131,139.25 * (1 + 0.083)⁵

= $131,139.25 * 1.4898

= $195,377.69