The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $25,000 and is expected to result in cash inflows of $3,000 at the end of year 1, $6,000 at the end of years 2 and 3, $10,000 at the end of year 4, $8,000 at the end of year 5, and $7,000 at the end of year 6.
a. Draw and label a time line depicting the cash flows associated with Starbuck Industries’ proposed investment.
b. Use arrows to demonstrate, on the time line in part a, how compounding to find future value can be used to measure all cash flows at the end of year 6.
c. Use arrows to demonstrate, on the time line in part b, how discounting to find present value can be used to measure all cash flows at time zero.
d. Which of the approaches—future value or present value—do financial managers rely on most often for decision making? Why?