Question

What is the future value at the end of year four of the following set of end-of-year cash flows? Assume an interest rate of 8 percent. Year Cash Flow 1 $1,000 2 -$1,000 3 $1,000 4 -$1,000

  A) $0.00   B) $127.38   C) $173.31   D) $379.41   E) $3,312.13

The answer is B but I got E using the calculations below. How do you get $173.31?

PV= 1,000/(1+.08) + 1,000/(1+.08)^2 + 1,000/ /(1+.08)^3 + 1,000//(1+.08)^4 = 3312.127

Answer 1

The question is solved by first calculating the present value.

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0. Since there is no initial cash flow for this question.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the interest rate of 8%
• Press the down arrow and CPT buttons to get the net present value.  

Net Present value of cash flows at 8% interest rate is $127.39.

Enter the below in a financial calculator to compute the future value:

PV= -127.39

N= 8

I/Y= 4

Press the CPT key and FV to compute the future value.

The value obtained is 173.31.

Therefore, the future value of the cash flow is $173.31.