Question

13. You will receive $500 tomorrow. You will receive an additional nine cash flows growing at...

13. You will receive $500 tomorrow. You will receive an additional nine cash flows growing at the rate of inflation of 2 percent per year. The nominal interest rate is 10 percent.

a. Find the value of the stream of cash flows. Make sure to show your work.

b. What is the real value of each cash flow received? Make sure to show your work.

c. Find the value of the stream of cash flows, based on real values. Make sure to show your work.

d. What do you observe? Explain.

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Answer #1
Time 0 1 2 3 4 5 6 7 8 9
Actual Cashflow 500 510 520.2 530.604 541.2161 552.0404 563.0812 574.3428 585.8297 597.5463
PV of cash flow 463.6364 429.9174 398.6506 369.6579 342.7737 317.8447 294.7287 273.2939 253.418

PV of Stream of Cash Flows 3643.921

A) Value of stream of Cash flows = 5474.86 (based on the summation of cash flows)

B) PV Of Cash Flow in the table above represents the real value of cash flow Received

C) The real value of the stream of cash flow is 3643.921

D) The observation is the value of money is depleting year on year and is worth much more as the growth is low.

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