Question

Problem 4-40 Moving Cash Flows (LG5)

You are scheduled to receive a $480 cash flow in one year, a $980 cash flow in two years, and pay a $780 payment in three years. Interest rates are 10 percent per year.

What is the combined present value of these cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Combined present value of cash flows Future Value At age 30 you invest $3,300 that earns 9.25 percent each year. At age 40 you invest $3,300 that earns 12.25 percent per year. In which case would you have more money at age 60? a. At age 30 invest $3,300 at 9.25 percent. b. Both yield the same amount at age 60. c.At age 40 invest $3,300 at 12.25 percent. d.There is not enough information to determine which case earns the most money at age 60.

$

Answer 1

Receive $480 in Year1

Receive $980 in Year2

Make a Payment in $780 in Year3

Interest Rates= 10%

Present Values of these Cash Flows = Receive $480 in Year1/ (1+ interest rate) ^1 + Receive $980 in Year2/ (1+ interest rate) ^2 – Payment in Year3/ (1+ interest rate) ^3

Or, Present Values of these Cash Flows = $480/ (1.1) + $980/ (1.1) ^2 - $780/ (1.1) ^3

Or, Present Values of these Cash Flows = $436.36 + $809.92 – 586.03= $660.25

Combined Present Values of these Cash Flows is $660.25

Contribution at the age of 30= $3300

Interest Rate = 9.25% per year

Number of years = 30

Contribution at the age of 40= $3300

Interest Rate = 12.25% per year

Number of years = 20

Future Values of Cash Flows at the end of 60 from the time period of 30= $3300* (1+ rate of interest) ^30= $3300*(1.0925) ^30

Or, Future Values of Cash Flows at the end of 60 from the time period of 30 = $46898.32

Future Values of Cash Flows at the end of 60 from the time period of 40= $3300* (1+ rate of interest) ^20= $3300*(1.1225) ^20

Or, Future Values of Cash Flows at the end of 60 from the time period of 40 = $33284.42

So by the end of 60 years, I will have more if I invest $3300 for 30 years @9.25%.

So option (a) is correct.