Question

1) (12 pts) The following is a cash flow diagram: Cash Flows: 20000 10000 Cash Flow $35,000 $5,000 $7,500 $1000 $10,000 $5,000 Year 0 1 2 4 >-10000 -20000 30000 40000 Years 4 Annual Interest rate = 10%, compounded annually a) Calculate the Present wortlh b) Calculate the equivalent annuity for these cash flows c) Calculate the future worth of these cash flows at 5 years

Answer 1

a) PW = -35,000 + 5,000(P/F, 10%, 1) + 7,500(P/F, 10%, 2) - 1,000(P/F, 10%, 3) + 10,000(P/F, 10%, 4) + 5,000(P/F, 10%, 5)

        = -35,000 + 5,000(0.9091) + 7,500(0.8264) - 1,000(0.7513) + 10,000(0.6830) + 5,000(0.6209)

        = -35,000 + 4,545.5 + 6,198 - 751.3 + 6,830 + 3,104.5

        = -$15,073.3

b) Equivalent Annuity = -15,073.3(A/P, 10%, 5)

                                   = -15,073.3(0.2638)

                                   = -$3,876.34

c) FW = -15,073.3(F/P, 10%, 5)    

          = -15,073.3(1.611)

          = -$24,283.09