Question

Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 5 if the interest rate is 8 percent

Answer 1

Answer:

$33,445.44

Explanation:

The future value of an investment is its worth at a future date if the investment is done at a specific interest rate compounded yearly for certain number of years

It is computed as follows:

FV = PV (1+r)^n

FV = Future Value, PV = present value, r- interest rate, n- number of years

Future value of $7500 after 3 years:

FV = 7500× (1.08)^3 = 9,447.84

Future Value of $9000 after 2 years:

FV = 9000 × (1.08^2) = $10,497.6

Future value of $12,500 after 1 year:

FV = 12500× 1.08 = $13,500

The future value of these cashflows at the end of year 5

= 9,447.8 + 10,497.6 + 13,500

= $33,445.44

Answer 2

Answer:

$33445.44

Explanation:

Fv = Pv ( 1 + R )ⁿ formula for calculating compound interest

Fv = future value

Pv = present value

R = interest rate = 0.08

n = number of years

Troy receives different cash flows at different times of the investment so to get the future value of each cash flow : substrate the number of years from the year five ( 5 ) to get the value of n for each cash flow

For $7500

n = 5 - 2 = 3

Fv = 7500 ( 1.08 )³ = 9447.84

For $9000

n = 5 - 3 = 2

Fv = 9000 ( 1.08 )² = 10497.6

For $12500

n = 5 - 4 = 1

Fv = 12500 ( 1.08 ) = 13500

the future value of these cash flows = 9447.84 + 10497.6 + 13500 = $33445.44