Which formula moves a cash flow of \$800 ahead six years in time at an interest rate of 5\%?

• A. \$800 \div (1 + 0.05)^6$
• B. \$800 \times (1 + 0.05)^6$
• C. \$800 \div (1 - 0.05)^6$
• D. \$800 \times (1 - 0.05)^6$

Answer: (B)

Verified step by step guidance

1. Understand the concept: Moving a cash flow ahead in time involves calculating its future value using the formula for compound interest. The formula for future value is: FV = PV × (1 + r)^n, where PV is the present value, r is the interest rate, and n is the number of periods.
2. Identify the given values: The present value (PV) is \$800, the interest rate (r) is 5% or 0.05, and the number of periods (n) is 6 years.
3. Determine the correct formula: To move the cash flow ahead in time, we use the future value formula, FV = PV × (1 + r)^n. This formula accounts for compounding interest over the specified number of periods.
4. Compare the options provided: The correct formula matches FV = \$800 × (1 + 0.05)^6, as it uses the future value formula. The other options either divide the cash flow or use subtraction, which are incorrect for calculating future value.
5. Conclude the reasoning: The correct formula is \$800 × (1 + 0.05)^6 because it properly calculates the future value of the cash flow by compounding the interest rate over six years.