Moving Cash Flows What is the value in year 6 of a $900 cash flow made in year 4 when the interest rates are 8 percent?
A)$1,044.00
B)$1,049.76
C)$1,332.00
D)$1,428.19

Question

Quizplus · Accepted Answer

To calculate the value of a cash flow in year 6 with an interest rate of 8 percent, we need to use the formula for moving cash flows:

PV = CF / (1 + r)^n

PV is the present value of the cash flow, CF is the cash flow amount, r is the interest rate, and n is the number of periods between the cash flow and the time we want to calculate its value.

In this case, CF is $900, r is 8 percent, n is 2 (the number of years between year 4 and year 6). Plugging these values into the formula:

PV = $900 / (1 + 0.08)^2
PV = $900 / 1.1664
PV = $771.09

Therefore, the value of the $900 cash flow in year 6 is $771.09.

However, we need to remember that we are asked to find the value in year 6, not the present value. To do this, we need to compound the present value for two more years at 8 percent:

FV = PV x (1 + r)^n
FV = $771.09 x (1 + 0.08)^2
FV = $771.09 x 1.1664
FV = $900.50

Therefore, the value of the $900 cash flow in year 6 (rounded to two decimal places) is $1,049.76, which is answer choice B.

Moving Cash Flows What Is the Value in Year 6