Question

Wells, Inc., has identified an investment project with the following cash flows.

Year	Cash Flow
1		$	940
2			1,170
3			1,390
4			2,130

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

Part A)

What is discounted cash flow model

The discounted cash flow method is used by professional investors and analysts at investment banks to determine how much to pay for a business, whether it’s for shares of stock or for buying a whole company.

And it’s also used by financial analysts and project managers in major companies to determine whether a given project will be a good investment, like for a new product launch or a new manufacturing facility.

It’s applicable to any scenario where you are considering paying money now in expectation of receiving more money in the future.

I’ve personally used it both for engineering projects and stock analysis.

Put simply, discounted cash flow analysis rests on the principle that an investment now is worth an amount equal to the sum of all the future cash flows it will produce, with each of those cash flows being discounted to their present value.

Here’s the equation:

DCF = CF1/(1+r)1 + CF2/(1+r)2 + CFn/(1+r)n.

where: CF = the cash flow for the given year.

CF1 is for year one,

CF2 is for year two, CFn is for additional years

Here in the question is to calculate  future value of these cash flows in Year 4, with % discounted rate

DCF4 = 21.30/(1+0.06)4

= 21.30/1.26247696

=16.87 is the answer

PART 2

WITH 14% RATE THE VALUE WOULD BE

= 21.30/(1+0.14)4 = 21.30/(1.14)4

=21.30/1.68896016

= 12.61

PART 3

WITH 21% RATE THE VALUE WOULD BE

= 21.30/ (1+0.21)4

= 21.30/(1.21)4

  =21.30/2.14358881

= 9.94