5. Practice Example

Let's practice this with an additional example:

 

Example 4

Suppose your investment proposal has the following cash flows:

  • Invest 5'000 in 1 year (C1 = 5'000)
  • Invest 20'000 in 3 years (C3 = 20'000)
  • Withdraw 8'000 in 5 years (C5 = -8'000)

  

How much money will be in the bank account in 7 years if the interest rate is 10%?

  

Following our standard procedure, we can write:

 

\( FV_T = \sum_{t=0}^{T} C_t \times (1+R)^{(T-t)} \)

 

When we write out the expression with the cash flows from above, we get:

  

\( FV_{7} = C_1 \times (1+R)^{(7-1)} + C_3 \times (1+R)^{(7-3)} + C_5 \times (1+R)^{(7-5)} \)

 

\( FV_7 = 5'000 \times 1.1^6 + 20'000 \times 1.1^4 - 8'000 \times 1.1^2 \)

 

\( FV_7 = 8'857.78 + 29'282.0 - 9'680.0 = 28'459.8 \)

  

The future value of the investment proposal in 7 years therefore is 28'459.8. We get the same result when modelling the year-to-year balance of the investment account:

  

Practice example multiple cash flows