Question

A 3-period investment project has the following cash flows at times t = 0, 1, 2, and 3: -21, 16, -43, and 42 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 third number?

Answer 1

The value of the third number in the bottom row of the cash flow triangle is -48.

Step-by-step explanation:

The cash flows for the 3-period investment project are as follows:

t = 0: -21

t = 1: 16

t = 2: -43

t = 3: 42

To complete the triangle for this project, we need to calculate the cumulative cash flows at each period. The cumulative cash flow at each period is the sum of all the cash flows up to that period.

The triangle for this project would be as follows:

t = 0: -21

t = 1: -21 + 16 = -5

t = 2: -21 + 16 - 43 = -48

t = 3: -21 + 16 - 43 + 42 = -6

Reading the numbers of the bottom row of the triangle from left to right, the value of the third number is -48.