Question

Select the correct phrases to complete the sentence. To find the future value of multiple cash flows, find the __________ of each cash flow and __________. a.) future value; multiply them b.) future value; add them together c.) present value; multiply them d.) present value; add them together

Answer 1

The correct phrases to complete the sentence for calculating the future value of multiple cash flows are to find the 'present value' of each cash flow and 'add them together', which accounts for the time value of money at a given 15% interest rate.

Step-by-step explanation:

To find the future value of multiple cash flows, one must find the present value of each cash flow and add them together. This process involves calculating the present discounted value (PDV) for each individual cash flow at different times and summing them to determine the total value in the future, given a specified interest rate. In this context, a 15% interest rate is used to discount future cash flows to their present values. Once the present value of each cash flow has been calculated, they must be added together to arrive at the future value.

For example, if there are future profits expected at different time periods, one would apply the formula to calculate the PDV for each benefit individually. Then, to get the total future value, these PDVs would be summed up. This approach takes into account the time value of money, recognizing that receiving a certain amount of money in the future is not equivalent to receiving that same amount today, due to the potential interest earnings if the money were invested.

Answer 2

To calculate the future value of multiple cash flows, the present value for each cash flow should be calculated separately using the discount rate and then summed up to find the total future value.

Step-by-step explanation:

To find the future value of multiple cash flows, one must find the present value of each cash flow and then add them together. This process involves calculating what the amount to be received in the future is worth in the present, using a discount rate (in this case, 15% interest rate). Once the present value for each cash flow has been calculated, these values are added up to obtain the total future value of the cash flows. It is important to perform a separate present value (PV) calculation for each amount to be received at different times before summing them up, which ultimately gives us the future value of the combined cash flows.