ECONOMICS
FINANCIAL MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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$9, 188.18
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$9, 473.67
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$9, 694.67
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$9, 764.17
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Detailed explanation-1: -The present value of a cash flow (i.e. the value of future cash in today’s dollars) is calculated by multiplying the cash flow for each projected year by the discount factor, which is driven by the discount rate and the matching time period.
Detailed explanation-2: -As shown in the analysis above, the net present value for the given cash flows using a discount rate of 10% is equal to $0. This means that with an initial investment of exactly $1, 000, 000, this series of cash flows will yield exactly 10%.
Detailed explanation-3: -For example, the present value of $1, 100 that you’ll earn one year from today at a 10% rate of return is $1, 000.
Detailed explanation-4: -Step 1 → First, the value of a future cash flow (FV) is divided by the present value (PV) Step 2 → Next, the resulting amount from the prior step is raised to the reciprocal of the number of years (n) Step 3 → Finally, one is subtracted from the value to calculate the discount rate.