Question

Problem 4-7 Present and Future Value of an Uneven Cash Flow Stream An investment will pay $200 at the end of each of the next 3 years, $400 at the end of Year 4, $600 at the end of Year 5, and $800 at the end of Year 6. If other investments of equal risk earn 8% annually, what is its present value? Round your answer to the nearest cent.What is its future value? Round your answer to the nearest cent.

Answer 1

Present value=Cash flows*Present value of discounting factor(rate%,time period)

=200/1.08+200/1.08^2+200/1.08^3+400/1.08^4+600/1.08^5+800/1.08^6

=200/1.08+200/1.08^2+200/1.08^3+400/1.08^4+600/1.08^5+800/1.08^6

=$1721.92(Approx)

We use the formula:  
A=P(1+r/100)^n
where   
A=future value
P=present value  
r=rate of interest
n=time period.

Future value=1721.92*(1.08)^6

=$2732.47(Approx)