Question

Astrid makes an investment with a zero net present value. She pays $700 today, and receives...

Astrid makes an investment with a zero net present value. She pays $700 today, and receives $400 one year from today, no money two years from today, and _____ three years from today. There are no other cash flows, and her effective annual interest rate is 8%.

Select one:

a. $400

b. $385

c. $415

d. $370

e. $355

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Homework Answers

Answer #1
Let us assume cash flow received three years from today be C.
The net present value of cash flows is given zero.
NPV = Present Value of cash outflow + Present value of future cash inflows
0 = -700 + [400*(1/1.08^1)]+ [0 * (1/1.08^2)]+[C*(1/1.08^30]
0 = -700 + [400*0.92593]+ [0 * 0.85734]+[C*0.79383]
0 = -700 + 370.37+ 0 + 0.79383C
0 = -329.63 + 0.79383C
329.63 = 0.79383C
C = 415.24
Cash flows received three years from today = $415
The answer is Option c.
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