Question

You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?
Years: 0 1 2 3 4
Cash Flows: $0 $1,000 $2,000 $2,000 $2,000

Answer 1

Answer:

The effective price you received for the car was $5,987

Explanation:

Effective price of the car can be calculated by the Net Present values of all the cash flows associated with the note.

Using following present value formula for each cash flows

Pv = FV  / ( 1 + r )^n

Net Present Value of all call flows = [ $1,000 / ( 1 + 6% )^1 ] + [ $2,000 / ( 1 + 6% )^2 ] +  [ $2,000 / ( 1 + 6% )^3 ] + [ $2,000 / ( 1 + 6% )^4 ]

NPV = $943.4 + 1,780 + $1,679.24 + $1,584.19 = $5,986.83 = $5,987