Fuente, Inc., has identified an investment project with the following cash flows.

Fuente, Inc., has identified an investment project with the following cash flows.

Year       Cash Flow

1                           $             960       

2                                          1,190    

3                                          1,410    

4                                          2,150    

a.            If the discount rate is 9 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b.            If the discount rate is 12 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c.            If the discount rate is 23 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation

The time line is:

0	1	2	3	4
	$960	$1,190	$1,410	$2,150

To solve this problem, we must find the FV of each cash flow and sum. To find the FV of a lump sum, we use:

FV = PV(1 + r)t

FV@9% = $960(1.09)3 + $1,190(1.09)2 + $1,410(1.09) + $2,150 = $6,343.97

FV@12% = $960(1.12)3 + $1,190(1.12)2 + $1,410(1.12) + $2,150 = $6,570.67

FV@23% = $960(1.23)3 + $1,190(1.23)2 + $1,410(1.23) + $2,150 = $7,471.08

Notice, since we are finding the value at Year 4, the cash flow at Year 4 is added to the FV of the other cash flows. In other words, we do not need to compound this cash flow.

Calculator Solution:

CFo	$0	CFo	$0	CFo	$0
C01	$960	C01	$960	C01	$960
F01	1	F01	1	F01	1
C02	$1,190	C02	$1,190	C02	$1,190
F02	1	F02	1	F02	1
C03	$1,410	C03	$1,410	C03	$1,410
F03	1	F03	1	F03	1
C04	$2,150	C04	$2,150	C04	$2,150
F04	1	F04	1	F04	1
I = 9		I = 12		I = 23
NFV CPT		NFV CPT		NFV CPT
$6,343.97		$6,570.67		$7,471.08

Thank you!