Question

Problem 5-3 Future Value and Multiple Cash Flows [LO 1] Wells, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $ 1,060 2 1,290 3 1,510 4 2,250 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. What is the future value at an interest rate of 14 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the future value at an interest rate of 21 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

a. $6,562.52

b. $7,218.32

c.$7,843.64

Explanation:

The present value of the cash flows would be found first and after, the present value has been determined, the future value would be found

Present value can be calculated using a financial calculator

Cash flow in year  1 = $1,060

Cash flow in year  2 = $1,290

Cash flow in year  3 = 1,510

Cash flow in year  4 = $2,250

Present value when interest rate is 6% = $5,198.131267

Present value when interest rate is 14% = $4,273.825287

Present value when interest rate is 21% = $3,659.117655

Now we find the future value

Future value = present value ( 1 + r)^n

r = interest rate

n = number of years

a. $5,198.131267(1.06)^4 = $6,562.52

b. $4,273.825287(1.14)^4 = $7,218.32

c. $3,659.117655 (1.21)^4 = $7,843.64

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute