The value today of the following cash flows is $5,976.97 at an interest rate of 4.6 percent. What is the value of the Year 3 cash flow

$1428.69

Explanation:

Here are the cash flows used in answering this question :

Year  Cash Flow

1         $1,485

2         1,605

3            ?

4         2, 205

The present value of the cash flows is  $5,976.97. This includes the value of the unknown year 3 cash flow

To find the value of the unknown year 3 cash flow, we have to determine the present value of the cash flows excluding year 3's cash flow (i.e. year 3 's cash flow would be zero).

Then we subtract the value we get from the above step from  $5,976.97 .

We then find the future value of the figure from the above step.

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 = $1,485

Cash flow in year 2 =  1,605

Cash flow in year 3 = 0

Cash flow in year 4 =  2205

I = 4.6%

PV = $4728.60

$5,976.97 -  $4728.60 = $1248.37

Formula for calculating future value

The formula for calculating future value:

FV = P (1 + r)^n

FV = Future value  

P = Present value  

R = interest rate

N = number of years

$1248.37(1.046)^3 = $1428.69

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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