Question

Blossom Inc., management is expecting a new project to start paying off, beginning at the end of next year. Cash flows are expected to be as follows: 0 1 2 3 4 5 $439,676 $488,452 $465,455 $467,326 $546,444 If Blossom can reinvest these cash flows to earn a return of 8.7 percent, what is the future value of this cash flow stream at the end of 5 years? What is its present value?

Answer 1

1]	FUTURE VALUE OF THE CASH FLOW STREAM:
	Year	Cash flows	FVIF at 8.7%	FV at 8.7%
	0
	1	$       4,39,676	1.39611	$      6,13,834
			[1.087^4]
	2	$       4,88,452	1.28437	$      6,27,351
			[1.087^3]
	3	$       4,65,455	1.18157	$      5,49,967
	4	$       4,67,326	1.08700	$      5,07,983
	5	$       5,46,444	1.00000	$      5,46,444
	Future value of the cash flow stream	$   28,45,579
	FVIF = 1.087^t, where t = 4, 3, 2, 1 and 0
2]	PRESENT VALUE OF THE CASH FLOW STREAM:
	Year	Cash flows	PVIF at 8.7%	PV at 8.7%
	0
	1	$       4,39,676	0.91996	$      4,04,486
			[1/1.087]
	2	$       4,88,452	0.84633	$      4,13,393
			[1/1.087^2]
	3	$       4,65,455	0.77859	$      3,62,401
	4	$       4,67,326	0.71628	$      3,34,735
	5	$       5,46,444	0.65895	$      3,60,079
	Present value of the cash flow stream	$   18,75,094
	PVIF = 1/1.087^t, where t = 1, 2, 3, 4 and 5.