What is the Present Value of the following cash flows at an interest rate of 7% AER? A.) $900 received one year from now. B.) $900 received 10 years from now. C.) $900 received each year beginning 1 year from now and ending in 10 years. D.) $900 received each year beginning 1 year from now and continuing forever.

Question

Business

Payton Sharp

3 December, 22:05

What is the Present Value of the following cash flows at an interest rate of 7% AER? A.) $900 received one year from now. B.) $900 received 10 years from now. C.) $900 received each year beginning 1 year from now and ending in 10 years. D.) $900 received each year beginning 1 year from now and continuing forever.

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Answers (1)

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Isla Wu · Answer 1

A.) $900 received one year from now.

$841.12

B.) $900 received 10 years from now.

$457.51

C.) $900 received each year beginning 1 year from now and ending in 10 years.

$6321.22

D.) $900 received each year beginning 1 year from now and continuing forever.

$12,857.14

Explanation:

Interest Rate = 7%

A.)

Cash flow = $900

Period = 1 year

PV = FV / (1 + r) ^n

PV = $900 / (1 + 0.07) ^1

PV = $900 / 1.07

PV = $841.12

B.)

Cash flow = $900

Period = 10 year

PV = FV / (1 + r) ^n

PV = $900 / (1 + 0.07) ^10

PV = $900 / 1.96715

PV = $457.51

C.)

Cash flow = $900

Period = 10 year

P = [ r x PV / 1 - (1 + r) - n]

$900 = [ 0.07 x PV / 1 - (1 + 0.07) - 10]

$900 = [ 0.07 x PV / 1 - (1.07) - 10]

PV = ($900 x 0.491651) / 0.07

PV = $6321.22

D.)

Cash flow = $900

Period = 10 year

PV = Pmt / i

PV = $900 / 0.07

PV = $12,857.14