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

Problem 6-3 Future Value and Multiple Cash Flows [LO1]
Fuente, Inc., has identified an investment project with the following cash flows.
Year    Cash Flow
1         $    940   
2              1,170   
3              1,390   
4              2,130   


a.   
If the discount rate is 6 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 14 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 21 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
	$940	$1,170	$1,390	$2,130

 

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@6% = $940(1.06)3 + $1,170(1.06)2 + $1,390(1.06) + $2,130 = $6,037.57

FV@14% = $940(1.14)3 + $1,170(1.14)2 + $1,390(1.14) + $2,130 = $6,627.78

FV@21% = $940(1.21)3 + $1,170(1.21)2 + $1,390(1.21) + $2,130 = $7,190.16

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	$940	C01	$940	C01	$940
F01	1	F01	1	F01	1
C02	$1,170	C02	$1,170	C02	$1,170
F02	1	F02	1	F02	1
C03	$1,390	C03	$1,390	C03	$1,390
F03	1	F03	1	F03	1
C04	$2,130	C04	$2,130	C04	$2,130
F04	1	F04	1	F04	1
I = 6		I = 14		I = 21
NFV CPT		NFV CPT		NFV CPT
$6,037.57		$6,627.78		$7,190.16

Thanks