Question

# The value of the following cash flows four years from today is \$7,201.27. The interest rate...

The value of the following cash flows four years from today is \$7,201.27. The interest rate is 4.3 percent. What is the value of the Year 3 cash flow?

 Year Cash Flow 1 \$ 1,465 2 \$ 1,592 3 \$ ? 4 \$ 2,565

Multiple Choice

A. \$1,094.80

B. \$1,190.98

C. \$1,295.60

D. \$1,242.19

E. \$1,190.98

The value of the year 3 cash flow is computed as shown below:

Value of cash flows four years from today = Year 1 cash flow x (1 + interest rate)3 + Year 2 cash flow x (1 + interest rate)2 + Year 3 cash flow x (1 + interest rate)1 + Year 4 cash flow

\$ 7,201.27 = \$ 1,465 x 1.0433 + \$ 1,592 x 1.0432 + Year 3 cash flow x 1.0431 + \$ 2,565

\$ 7,201.27 = \$ 1,662.227833 + \$ 1,731.855608 + Year 3 cash flow x 1.0431 + \$ 2,565

\$ 7,201.27 - \$ 1,662.227833 - \$ 1,731.855608 - \$ 2,565 = Year 3 cash flow x 1.0431

\$ 1,242.186559 / 1.043 = Year 3 cash flow

Year 3 cash flow = \$ 1,190.98 Approximately

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