The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the present value of the year 3 cash flow?
A) $10,213.35
B) $12,372.00
C) $9,777.77
D) $9,105.23
E) $13,285.83

Question

Quizplus · Accepted Answer

To find the present value of the year 3 cash flow, we need to discount it back to the present using the real discount rate. The formula for the present value (PV) is PV = FV / (1 + r)^n, where FV is the future value ($12,372), r is the real discount rate (4%), and n is the number of years (3). The real discount rate already accounts for inflation, so we don't need to adjust the cash flow for inflation. Plugging the numbers into the formula gives us PV = $12,372 / (1 + 0.04)^3 = $10,213.35.

The Cash Flow in Dollars Received in Year 3 Is