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
•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


Modifié le: mardi 14 août 2018, 08:41