Consider the following timeline: If the current market rate of interest is 12%,then the present value of the cash flows is closest to:
A) $20.67
B) $320.67
C) -$20.67
D) $70.00

Question

Consider the following timeline:  If the current market rate of interest is 12%,then the present value of the cash flows is closest to:
A) $20.67 
B) $320.67 
C) -$20.67 
D) $70.00

Quizplus · Accepted Answer

A)
PV of year 1 cash flow = PV = FV/(1+r)^n = 40/(1.12)^1 = 35.7143
PV of year 2 cash flow = PV = FV/(1+r)^n = 80/(1.12)^2 = 63.7755
PV of year 3 cash flow = PV = FV/(1+r)^n = 100/(1.12)^3= 71.1780
So the answer is -140 + 35.7143+63.7755+71.1780 = 20.6678

Consider the Following Timeline: If the Current Market Rate