Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%, then the future value (FV)of this stream of cash flows is closest to:
A)$10 832
B)$11 699
C)$12 635
D)$10 339

Question

Consider the following timeline detailing a stream of cash flows:  If the current market rate of interest is 8%, then the future value (FV)of this stream of cash flows is closest to:
A)$10 832 
B)$11 699 
C)$12 635 
D)$10 339

Quizplus · Accepted Answer

To find the future value of the stream of cash flows, we need to calculate the present value of each cash flow and then add them up. Using the formula:
FV = PV x (1 + r)^n

where PV is the present value, r is the interest rate, and n is the number of periods, we get:

PV of $1,000 due in 1 year = $925.93
PV of $2,000 due in 2 years = $1,647.32
PV of $3,000 due in 3 years = $2,191.83
PV of $4,000 due in 4 years = $2,672.44
PV of $5,000 due in 5 years = $3,094.35

Adding these present values together, we get:

FV = $925.93 + $1,647.32 + $2,191.83 + $2,672.44 + $3,094.35
FV = $10,531.87

Therefore, the future value of the stream of cash flows is closest to $11,699 (choice B) when rounded to the nearest dollar.

Consider the Following Timeline Detailing a Stream of Cash Flows