Question

You are given information on the following alternative cash flow streams. Assuming an interest rate of 8% p.a. which alternative cash flow stream has the lowest future value at the end of year 7?

Group of answer choices

$20,000 per year, at the end of each year, for the next 7 years.

$50,000 at the end of year 1 and $70,000 at the end of year 2.

$100,000 today.

$160,000 at the end of year 5.

Answer 1

To solve this question, we'll have to find the future values(FV) of each of the answer choices.

A. $20,000 per year, at the end of each year, for the next 7 years:

This is the case of annuity.

FV = 178,456.06

B. $50,000 at the end of year 1 and $70,000 at the end of year 2:

(At the end of year 2 means we have to compound it by 5 years to make it reach year 7. Same for end of year 1)

FV = 182,196.68

C. $100,000 today:

FV = 171,382.42

D. $160,000 at the end of year 5:

At the end of year 5 means that we have to compound it by 2 years to find it's the future value at year 7.

FV = 186,642

Comparing the future values of all the four answer choices, we can conclude that the lowest future value at the end of year 7 can be found in the third answer choice: $100,000 today.