Answer to Question #191059 in Economics for Ali

Question

1.      Arvin has been offered a contract through which he expects to generate the following stream of cash flows. Cash flows will occur at the end of the nominated years.

 

Cash Flows

Year 0

 

Year 1

+$ 5,000

Year 2

 

Year 3

+$ 5,000

Year 4

–$ 2,500

Year 5

+$ 2,700

Year 6

 

Year 7

 

Year 8

+$ 8,000

Year 9

 

Year 10

+$20,000

 

Arvin expects the market interest rates will be 2.5% per annum for the next 5 years, then it will increase to 5% per annum for the following three years (years 6 – 8) and will increase again in years 9 – 10 to 6% per annum.

 

Assuming Arvin’s expectations regarding cash flows and interest rates are correct calculate the accumulated value of all these cash flows at each of the following time.

 

a.      Today (Time0)

b.      6 years time (Time6)

c.      10 years time (Time10)

Answer 1

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