Future Value of a Mixed Stream PDF

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Future Value of a Mixed Stream tutorial...

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How to Find Future Value of a Mixed Stream Find the Future value at the end of year 5 of Stream A. All payments occur at the end of the year. Year 1

$1,000

Year 2

$3,000

Year 3

$5,000

Year 4

$10,000

Year 5

-$10,000

Interest rate 10% Solution: Approach 1: using the financial table titled “Future value of $1” or the formula of Future Value: FV = PV * (1+i)^n The most common way how to find future value of a mixed stream of payments is to calculate future value of each payment separately and to find the sum of the future values. Future value of $1,000 received at the end of year 1 is FV=$1,000(FVIF10%,4 year)=$1,000X(1+0.1)^4 =$1,000 X 1.464=$1,464 Future value of $3,000 received at the end of year 2 is FV=$3,000(FVIF10%,3 year)=$3,000 X (1+0.1) ^3 = $3,000X1.331=$3,993 Future value of $5,000 received at the end of year 3 is FV=$5,000(FVIF10%,2 year)= $5,000 X (1+0.1) ^2 = $5,000X1.21=$6,050 Future value of $10,000 received at the end of year 4 is FV=$10,000(FVIF10%,1 year)= $10,000 X (1+0.1) ^1 = $10,000X1.1=$11,000 Future value of (-$10,000) received at the end of year 5 is FV= -$10,000(FVIF10%,0 year)= -$10,000 X (1+0.1) ^0 = -$10,000X1= - $10,000 Future value of stream A=$1,464+ $3,993+ $6,050+ $11,000- $10,000 = $12,507

Approach 2: Using Excel Please note that there is no build-in function in Excel to calculate Future value of mixed stream. We will be calculating future value of mixed stream in two steps: 1) Calculate present value of mixed stream using function NPV. 2) Calculate future value of the result of step 1 as the future value of a single amount. Find the Future value of Stream A: Year 1

$1,000

Year 2

$3,000

Year 3

$5,000

Year 4

$10,000

Year 5

-$10,000

Interest rate 10%

Step 1: Calculate present value of the stream using function NPV Click Formulas - Choose type - Financial - Choose NPV

Enter Rate 10% Value 1 1000 Value 2 3000 Value 3 5000 Value 4 10000 Value 5 -10000

DO NOT USE $ OR COMMA WHEN ENTERING THE VALUE

Get the result 7,765.93 Step 2: Calculate Future value of $7,765.93 using function FV: Click Formulas - Choose type - Financial - Choose FV

Enter: Rate 10% Number of periods 5 Payment 0 PV -7765.93 Type 0 Click OK

When you use Microsoft Excel or a financial calculator, remember that outflows generally have to be entered as negative numbers. In general, each problem in Time Value of Money will have at least one cash outflow (as a negative value), and at least one cash inflow (as a positive value). This is comparable to depositing money in the bank at some point in time (an outflow), and withdrawing money from the bank at another time (an inflow). Type 0 (the payments are made at the end of the period)

Get the answer: $12,507.11

The difference between two results may have occurred from rounding. We have used the data from the financial tables (Approach 1) that was rounded to the thousandths place....