Reading: Future Value of an Uneven Cash Flow
Uneven
Cash Flows Example
Echelon Company expects to receive annual cash flows as follows:
•Year
1 $2,000
•Year
2 $1,500
•Year
3 $0
•Year
4 $3,500
•Year
5 $4,800
Assuming an interest rate of 8%, what is the value at the end of year 5?
Figure
Out How to Solve the Question
•This
is a future value question.
•In
most cash flow equations that have involve future value there are five
variables:
- Present value
- Future value
- Payments
- Interest rate or discount rate
- Number of compounding periods
- Present value
- Future value
- Payments
- Interest rate or discount rate
- Number of compounding periods
•Is
there a present value? $0
•What
are the payments? Payments are given
•The
interest rate is also given, it is 8%.
•And
for the time period we are going out to the end of year 5.
How
Do We Determine the Future Value?
•Lets
break each payment into a separate future value calculation.
•Future
value = present value x (1+r)^n
•As
an example, for the payment in year 1 which is $2,000
- PV = 2,000; n = (5-1); r = 8%; pmt = 0, solve for FV
- FV = 2000 x (1+.08)^4 = 2,720.98
- PV = 2,000; n = (5-1); r = 8%; pmt = 0, solve for FV
- FV = 2000 x (1+.08)^4 = 2,720.98
Last modified: Tuesday, August 14, 2018, 8:41 AM