Question

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

Answer 1

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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