Question

A security promises a future cash flow of exactly $4,200 in 5 years and $10,000 in 10 years. If the interest rate is 15%, then what is the present value of this security?

$4,105.55

$4,240.44

$4,400.40

$4,559.99

Answer 1

Cash flow in Year 5 = $4,200

Cash flow in Year 10 = $10,000

Interest rate = 15%

Calculate the present value -

Present value = cash flow in year 5 (P/F, i, n) + cash flow in year 10 (P/F, i, n)

Present value = $4,200 (P/F, 15%, 5) + $10,000 (P/F, 15%, 10)

Present value = ($4,200 * 0.4972) + ($10,000 * 0.2472)

Present value = $2,088.24 + $2472 = $4,560.24

The present value of security is $4,560.24

This is closest to $4,559.99.

Thus,

The present value of this security is $4,559.99

Hence, the correct answer is the option (d).