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Consider the following information obtained today: • Relevant rate of return observed in the market = 6% per annum compounding monthly • Expected cash flow in 1 years’ time: $1000 Which of the following is closest to the PV of the cash flow given the information above? a) $941.91 b) $942.18 c) $943.40 d) $970.52

Question

Consider the following information obtained today:

• Relevant rate of return observed in the market = 6% per annum compounding monthly

• Expected cash flow in 1 years’ time: 1000WhichofthefollowingisclosesttothePVofthecashflowgiventheinformationabove?a)1000 Which of the following is closest to the PV of the cash flow given the information above? a) 941.91 b) 942.18c)942.18 c) 943.40 d) $970.52

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Solution

To find the present value (PV) of the cash flow, we need to use the formula for calculating the present value of a future cash flow, which is:

PV = CF / (1 + r/n)^(nt)

where:

  • CF is the future cash flow, which is $1000 in this case
  • r is the annual interest rate, which is 6% or 0.06 in this case
  • n is the number of times the interest is compounded per year, which is 12 times in this case (monthly compounding)
  • t is the number of years, which is 1 in this case

Substituting the given values into the formula, we get:

PV = 1000 / (1 + 0.06/12)^(12*1)

Calculating the above expression will give us the present value of the cash flow.

Let's calculate:

PV = 1000 / (1 + 0.005)^(12) PV = 1000 / (1.005)^12 PV = 1000 / 1.061678 PV = $942.595

The closest answer to this is option (b) $942.18.

This problem has been solved

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