Real Estate Fund is considering the purchase of a mixed-use project for $25,000,000. They estimate receiving cash flow equal to $3,200,000 for years 1 through 4 (i.e. Year 1 = $3,200,000; Year 2 = $3,200,000; Year 3 = $3,200,000; and Year 4 = $3,200,000). In Year 5, however, the Fund anticipates the cash flow will increase to $3,500,000. Thereafter, the cash flow will increase by 3% beginning in Year 6 and continue increasing annually by 3%. What is the cash flow for Year 7?

 

The cash flow for Year 7 is $3,713,150

Step-by-step explanation

Use following formula to calculate cash flow for year 7

Cash flow of year 7 = cash flow of year 5 x ( 1 + growth rate )^numbers of years from year 5 to year 7

Where

Cash flow of year 5 = $3,500,000

Growth rate = 3%

numbers of years from year 5 to year 7 = 2 years

Placing values in the formula

Cash flow of year 7 = $3,500,000 x ( 1 + 3% )^2

Cash flow of year 7 = $3,713,150

OR

There is another method to calculate the cash flows

Cash flow of year 6 = cash flow of year 5 x ( 1 + growth rate )

Where

Cash flow of year 5 = $3,500,000

Growth rate = 3%

Cash flow of year 6 = $3,500,000 x ( 1 + 3% )

Cash flow of year 6 = $3,605,000

Cash flow of year 7 = Cash flow of year 6 x ( 1 + growth rate )

Cash flow of year 7 = $3,605,000 x ( 1 + 3% )

Cash flow of year 7 = $3,713,150