Question

Consider the following two cash flows:

CF1: 100 at t=0, 200 at t=2, and 300 at t=3

CF2: X at t=1, X at t=2, and 2X at t=4

The interest rate rises by 3% every year, so:

between t=0 and t=1: i=0%; between t=1 and t=2: i=3%; between t=2 and t=3: i=6%, etc.

What the value of X that makes the two cash flows equivalent?

Question 3 options:

	86-106
	106-126
	126-146
	146-166
	None of the above

Answer 1

146-166

We first chalk out the cash-flows and discount them using the interest rates given

We input X=1, for assumption

Input the following constraints in an excel solver ( We take the Present value of both the cash flows equal)

Solving, we get

Hence, X= 155.815

Hence, 146-166 is the correct option