Which of the following processes can be used to calculate the future value of multiple cash flows?

• A. Averaging the cash flows and multiplying by the number of periods
• B. Subtracting each cash flow from the initial investment
• C. Compounding each cash flow to its future value and then summing the results
• D. Discounting each cash flow to its present value and then summing the results

Answer: (C)

Verified step by step guidance

1. Understand the concept of future value: Future value (FV) is the value of a cash flow or series of cash flows at a specific point in the future, calculated using the process of compounding.
2. Recognize that compounding involves applying the formula for future value to each cash flow. The formula for future value is: $\mathrm{FV}=\mathrm{PV}\cdot (1+r){\left(}^n$, where PV is the present value of the cash flow, r is the interest rate, and n is the number of periods.
3. Apply the formula to each individual cash flow in the series. For each cash flow, calculate its future value by substituting the respective values of PV, r, and n into the formula.
4. Sum the future values of all the individual cash flows to determine the total future value of the series of cash flows.
5. Avoid common misconceptions: Averaging the cash flows or subtracting them from the initial investment does not calculate future value. Discounting cash flows to their present value is used for present value calculations, not future value.