Question

What's the future value of this cash flow stream: $1,200 at the end of year 1, $0 at the end of year 2, and $500 at the end of year 3? the appropriate annual interest rate is 12%.

a. $2,055.41
b. $1,858.61
c. $1,955.15
d. $1,906.27
e. $2,005.28?

Answer 1

Cash flow:

0 1200 0 500
|_________|_______|______|

i=interest=0.12
P=present value (at appropriate time)
F=future value at end of year 3
n=number of elapsed years
we define:
F/P(P,i,n)=future value of P after n years with interest rate i
=P(1+i)^n

Value at end of third year is the sum of the value of individual years
=F/P(0,0.12,3)+F/P(1200,0.12,2)+F/P(0,0.12,1)+F/P(500,0.12,0)
=0+1505.28+0+500
=2005.28