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FinanceFundamentals of Financial Management (MindTap Course List)15th Edition

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Chapter 5, Problem 7P
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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section
Problem 1Q
Problem 2Q
Problem 3Q
Problem 4Q
Problem 5Q
Problem 6Q
Problem 7Q
Problem 8Q
Problem 1P
Problem 2P
Problem 3P
Problem 4P
Problem 5P
Problem 6P
Problem 7P
Problem 8P
Problem 9P
Problem 10P
Problem 11P
Problem 12P
Problem 13P
Problem 14P
Problem 15P
Problem 16P
Problem 17P
Problem 18P
Problem 19P
Problem 20P
Problem 21P
Problem 22P
Problem 23P
Problem 24P
Problem 25P
Problem 26P
Problem 27P
Problem 28P
Problem 29P
Problem 30P
Problem 31P
Problem 32P
Problem 33P
Problem 34P
Problem 35P
Problem 36P
Problem 37P
Problem 38P
Problem 39P
Problem 40P
Problem 41SP
Problem 42IC
BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An investment will pay $150 at the end of each of the next 3 years, S250 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 11% annually, what is its present value? Its future value?

Summary Introduction

To determine: The present value and the future value.

Introduction:

Present value:

The present value refers to that value which is the current value and by which the future value of the annuity is determined. The calculation of the future value depends on the present value which is calculated at a discounted rate.

Future value:

The future value is an investment value which will be realized in the future. With the help of the calculation of future value, an analysis of the amount to be invested can be made. This is very useful for the financial users and investors.

Explanation

Given,

The cash flow at the end of first 3 years is $150.

The cash flow at the end of the year 4 is $250.

The cash flow at the end of year 5 and 6 is $300 and $500.

The rate of interest is 11% annually.

Calculation of the present value of the cash flows:

The formula to calculate the present value of the cash flows:

PV=āˆ‘FV(1+I)N

Where,

  • FV is the future value,
  • PV is the present value,
  • I is the interest rate and,
  • N is the time period.

Substitute $150 for FV in 1st, 2nd and 3rd year, $250 for the FV in 4th year, $300 for FV in 5th year, $500 for the FV in 6th year, 11% for I and the value of N according to the years in the above formula.

PV=($150(1+0.11)1+$150(1+0.11)2+$150(1+0.11)3+$250(1+0.11)4+$300(1+0.11)5+$500(1+0.11)6)=($135.135+$121.743+$109.679+$164.682+$178.035+$267.320)=$976

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Ch-5 P-1QCh-5 P-2QCh-5 P-3QCh-5 P-4QCh-5 P-5QCh-5 P-6QCh-5 P-7QCh-5 P-8QCh-5 P-1PCh-5 P-2P
Ch-5 P-3PCh-5 P-4PCh-5 P-5PCh-5 P-6PCh-5 P-7PCh-5 P-8PCh-5 P-9PCh-5 P-10PCh-5 P-11PCh-5 P-12PCh-5 P-13PCh-5 P-14PCh-5 P-15PCh-5 P-16PCh-5 P-17PCh-5 P-18PCh-5 P-19PCh-5 P-20PCh-5 P-21PCh-5 P-22PCh-5 P-23PCh-5 P-24PCh-5 P-25PCh-5 P-26PCh-5 P-27PCh-5 P-28PCh-5 P-29PCh-5 P-30PCh-5 P-31PCh-5 P-32PCh-5 P-33PCh-5 P-34PCh-5 P-35PCh-5 P-36PCh-5 P-37PCh-5 P-38PCh-5 P-39PCh-5 P-40PCh-5 P-41SPCh-5 P-42IC

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