Question

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 $ 1,100 2 1,330 3 1,550 4 2,290 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.)

Answer 1

Answer:

Year 1 = $1,100

Year 2 = $1,330

Year 3 = $1,550

Year 4 = $2,290

(a) If the discount rate is 6 percent, then 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:

$FV=P(1+r)^{t}$

$FV=1,100(1.06)^{3} +1,330(1.06)^{2} +1,550(1.06)+2,290$

= $6737.51

(b)  If the discount rate is 14 percent, then the future value of these cash flows in Year 4:

$FV=1,100(1.14)^{3} +1,330(1.14)^{2} +1,550(1.14)+2,290$

= $7415.17

(c) If the discount rate is 21 percent, then the future value of these cash flows in Year 4:

$FV=1,100(1.21)^{3} +1,330(1.21)^{2} +1,550(1.21)+2,290$

= $8061.47