What is the value in year 4 of a $1,900 cash flow made in year 5 when interest rates are 11.0...

Question:

What is the value in year 4 of a $1,900 cash flow made in year 5 when interest rates are 11.0 percent?

Time Value of Money:

The value of money depreciates with time. So, the worth of $1 today is more than that at a later date. If the value of a cash flow is required at a date before the date of occurance of cash flow we have to discount the cash flow and if the value is required at the date after the occurance of cash flow we have to compound the cash flow.

Answer and Explanation:

The value in year 4 is $1,711.71

  • Value in year 5, V5 = $1,900
  • Rate of interest, r = 11% = 0.11

As we have to find the value in year 4, we have to discount the cash flow for 1 period to get the value of that cash flow in year 4.

Let the value in year 4 be V4

{eq}V4\ = \frac{V5}{(1 + r)^1}\\ V4\ = \frac{1900}{(1 + 0.11)^1}\\ V4\ = $1,711.71 {/eq}


Learn more about this topic:

Present and Future Value: Calculating the Time Value of Money

from Economics 102: Macroeconomics

Chapter 11 / Lesson 2
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