What is the value in year 10 of a $1,000 cash flow made in year 5 if interest rates are 9 percent in years 6 and 7, and increase to 13 percent in the remaining years?
A) $1,538.62
B) $1,691.47
C) $1,714.31
D) $1,799.42

Question

Quizplus · Accepted Answer

To find the value in year 10 of a $1,000 cash flow made in year 5, we need to compound the cash flow forward in time using the given interest rates. For years 6 and 7, the interest rate is 9%, and for years 8 through 10, the interest rate increases to 13%.First, we compound the $1,000 for two years at 9%:Future Value after 2 years = $1,000 * (1 + 0.09)^2 = $1,000 * 1.1881 = $1,188.10Then, we compound this amount for the next 3 years at 13%:Future Value after 3 more years = $1,188.10 * (1 + 0.13)^3 = $1,188.10 * 1.4425 = $1,714.31Therefore, the value in year 10 of the $1,000 cash flow made in year 5 is $1,714.31.

What Is the Value in Year 10 of a $1,000