Final answer:
The future value of Wildhorse, Inc.'s cash flows at the end of year 4, using a 10% discount rate, is calculated by compounding each year's cash flow to year 4. The cumulative future value amounts to $75,836.50.
Step-by-step explanation:
We need to calculate the future value of Wildhorse, Inc.'s cash flows, which management expects to earn over the next four years, using a discount rate of 10%. First, we will compound each cash flow to the end of year 4 using the formula Future value = Present value × (1 + Interest rate)number of years t.
For the cash flow of $12,500 received at the end of the first year, we will compound it for 3 more years:
$12,500 × (1 + 0.10)3 = $12,500 × 1.331 = $16,637.50
For the cash flow of $15,900 received at the end of the second year, we will compound it for 2 more years:
$15,900 × (1 + 0.10)2 = $15,900 × 1.21 = $19,239.00
For the cash flow of $18,600 received at the end of the third year, we will compound it for 1 more year:
$18,600 × (1 + 0.10)1 = $18,600 × 1.10 = $20,460.00
The cash flow of $19,500 received at the end of the fourth year does not need to be compounded, as it is already at the end of year 4.
The total future value at the end of year 4 is the sum of all these compounded values:
$16,637.50 + $19,239.00 + $20,460.00 + $19,500.00 = $75,836.50
The future value of Wildhorse, Inc.'s cash flows at the end of year 4 is $75,836.50.