Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent?

Question

Quizplus · Accepted Answer

To calculate the future value of the cash flows, we can use the formula:

FV = CF1 x (1 + r)^n-1 + CF2 x (1 + r)^n-2 + CF3 x (1 + r)^n-3 + CF4 x (1 + r)^n-4

Where: 
    CF1 = $0 (since there is no cash flow at the end of Year 1) 
    CF2 = $7,500 
    CF3 = $9,000 
    CF4 = $12,500 
    r = 8% 
    n = 6 (since we want to calculate the future value at the end of Year 6)

Plugging in the values:

FV = $0 x (1 + 0.08)^5 + $7,500 x (1 + 0.08)^4 + $9,000 x (1 + 0.08)^3 + $12,500 x (1 + 0.08)^2 
   = $0 + $9,945 + $9,228 + $12,948 
   = $36,121.08

Therefore, the best choice is C.

Troy Will Receive $7,500 at the End of Year 2