Question

7. Problem 5.07 Click here to read the eBook: Future Values Click here to read the eBook: Present Values Problem Walk-Through PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An investment will pay $50 at the end of each of the next 3 years, $250 at the end of Year 4, $350 at the end of Year 5, and $550 at the end of Year 6. a. If other investments of equal risk earn 7% annually, what is its present value? Round your answer to the nearest cent. to b. If other investments of equal risk earn 7% annually, what is its future value? Round your answer to the nearest cent.

Answer 1

(b) Let the cash flow in Year n be CF_n

Given
CF₁ = $50
CF₂ = $50
CF₃ = $50
CF₄ = $250
CF₅ = $350
CF₆ = $550

Discount Rate = r = 7%

Present Value = CF₁/(1+r) + CF₂/(1+r)² + CF₃/(1+r)³ + CF₄/(1+r)⁴ + CF₅/(1+r)⁵ + CF₆/(1+r)⁶
= 50/(1+0.07) + 50/(1+0.07)² + 50/(1+0.07)³ + 250/(1+0.07)⁴ + 350/(1+0.07)⁵ + 550/(1+0.07)⁶
= $937.97

(b) Future Value = CF₁(1+r)⁵ + CF₂(1+r)⁴ + CF₃(1+r)³ + CF₄(1+r)² + CF₅(1+r) + CF₆
= 50(1+0.07)⁵ + 50(1+0.07)⁴ + 50(1+0.07)³ + 250(1+0.07)² + 350(1+0.07) + 550
= $1407.64