Question

Paradise, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $625 2 875 3 1,150 4 1,250 Required: (a) If the discount rate is 11 percent, what is the future value of these cash flows in year 4? (b) What is the future value at a discount rate of 18 percent? (c) What is the future value at discount rate of 30 percent?

Answer 1

(a) If the discount rate is 11 percent, what is the future value of these cash flows in year 4?

To solve this problem, we must find the FV of each cash flow and add them.

To find the FV of a lump sum, we use:

FV = PV(1 + r)^t

FV@11% = $625(1.11)^3 + $875(1.11)^2+ $1,150(1.11) + $1,250 = $4459

(b) What is the future value at a discount rate of 18 percent?

FV = PV(1 + r)^t

FV@18% = $625(1.18)^3+ $875(1.18)^2+ $1,150(1.18) + $1,250 = $4852

(c) What is the future value at discount rate of 30 percent?

FV = PV(1 + r)^t

FV@30% = $625(1.30)^3+ $875(1.30)^2+ $1,150(1.30) + $1,250 = $5597