Question

A 2-period investment project has the following cash flows at times t = 0, 1, and 2: -45, 49, and 21, respectively. Complete the triangle for this project and then answer the following question pertaining to the bottom row of numbers; i.e., the row below the horizontal line. Reading the numbers of the bottom row of the triangle from left to right, what is the value of the second number?

Answer 1

To complete the triangle for this 2-period investment project, use the present value formula to calculate the present values of the cash flows. The value of the second number in the bottom row is 49/(1+r).

Step-by-step explanation:

To complete the triangle for this project, we can use the formula for the present value of a cash flow. The present value at time t=0 is given by the formula:

PV = CF/(1+r)^t

where PV is the present value, CF is the cash flow, r is the interest rate, and t is the time period. Applying this formula to the cash flows -45, 49, and 21, we can complete the triangle as follows:

-45/(1+r)^0 = -45

49/(1+r)^1 = 49/(1+r)

21/(1+r)^2 = 21/(1+r)^2

The bottom row of the triangle represents the present values of the cash flows, which are -45, 49/(1+r), and 21/(1+r)^2. Reading these numbers from left to right, the value of the second number is 49/(1+r).