Question

A) At a rate of 6.5%, what is the future value of the following cash flow stream?

In case the image above fails to load in your computer, or is not clear, the cash flows for years 0, 1, 2, 3 and 4 are $0, $75, $225, $0, and $300, respectively.

B) Assume you are going to receive a payment of $1,000 in 5 years. You'd like to know what that cash flow would be worth today. To calculate the answer, you use the given interest rate to obtain an equivalent cash flow expressed in today's dollars.

This is an example of calculating a...

Group of answer choices

Present Value

Future Value

Discounted Value

Annuity

Lump Sum

C) You check your credit card balance, and notice that the interest rate is quoted as 24% APR. You also know that interest is compounded monthly. What is the Effective Annual Rate on your credit card?

Answer 1

Solution

a. Formula for future value of a cashflow= cashflow*(1+r)^n

where

r= rate of interest

n= number of compounding periods

Therfore in this case the future value of cashflows at the end of 4th year are given below

Excel formula

Thus future value at end of 4th year is= 645.797

b. Since the calculation is going to be made for 1000 future cashflow after five years in todays terms it is basically calculating the Present value of 1000 today

Formula of Present value= Cashflow/(1+r)^n

r= rate of discounting

n= number of years

c. Interest rate = 24% APR (Annual percentage rate)

Since the compoundoing is monthly

Effective interest rate= [(1+i/n)^n]-1

Where

n= number of compounding periods in year

i= APR (Annual percentage rate)

Effective interest rate=[(1+.24/12)^12]-1

=26.8242%

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