Scottie Barnes has an investment that will pay him $6,400, $6,450, $7,225, and $7,500 over the next four years. If his opportunity cost is 10 percent, what is the future value of the cash flows he will receive? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

To find the future value of the cash flows, each cash flow must be compounded at the opportunity cost rate (10%) for the number of years until the end of the period. The future value (FV) formula for a single sum is FV = PV(1 + r)^n, where PV is the present value (the cash flow), r is the interest rate, and n is the number of periods.1. Year 4: $7,500 does not need to be compounded as it is received at the end of the period.2. Year 3: $7,225 compounded for 1 year = $7,225 * (1 + 0.10)^1 = $7,947.503. Year 2: $6,450 compounded for 2 years = $6,450 * (1 + 0.10)^2 = $7,797.504. Year 1: $6,400 compounded for 3 years = $6,400 * (1 + 0.10)^3 = $8,525.60Adding these amounts together gives the total future value: $7,500 + $7,947.50 + $7,797.50 + $8,525.60 = $31,770.60. Rounded to the nearest dollar, the future value is $31,770.

Scottie Barnes Has an Investment That Will Pay Him $6,400