Consider the following timeline: If the current market rate of interest is 12%,then the value of the cash flows in year 0 and year 2 as of year 1 is closest to:

Question

Consider the following timeline:  If the current market rate of interest is 12%,then the value of the cash flows in year 0 and year 2 as of year 1 is closest to:

Quizplus · Accepted Answer

First, we need to decode the timeline:
- The first five groups of characters (11ea8, 241_, 5358_, b92f_, bbd8_) represent the year 2000 through 2004 in hexadecimal format.
- The next group of characters (23d8) represents the number of 30-day periods from January 1, 2005 to the cash flow date of February 1, 2005.
- The last group of characters (245b7ff2) represents the amount of the cash flow in dollars, also in hexadecimal format.

So, we have two cash flows: one in year 0 (2005) and one in year 2 (2007). To find their values as of year 1 (2006), we need to discount them back one year using the given interest rate of 12%:

Year 0 cash flow: 
Discounting back one year means multiplying by (1 + 0.12) = 1.12
Value in year 1 = $245b7ff2 * 1.12^-1 = -$219.76

Year 2 cash flow:
Discounting back two years means multiplying by (1 + 0.12)^2 = 1.2544
Value in year 1 = $245b7ff2 * 1.2544^-1 = $193.19

Adding these two values gives:

Value in year 1 = -$219.76 + $193.19 = -$26.57

Rounding to the nearest dollar gives the answer of -$27.

Consider the Following Timeline: If the Current Market Rate