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%? Year 0-$0, Year 1-$1,000, Year 2-$2,000, Year 3-$2,000 and Year 4-$2,000.

Answer 1

The effective price received for the car is determined by calculating the present value of each future payment in the cash flow stream using a 6% interest rate and summing them up.

Step-by-step explanation:

The question asks about calculating the present value of a series of future cash flows from a note, using a given interest rate. To determine the effective price received for selling a car, we need to apply the present value formula to each payment in the cash flow stream.

Using the information provided for each year, we can calculate the present value (PV) at an interest rate of 6% as follows:

• PV of Year 1 = $1,000 / (1 + 0.06)^1
• PV of Year 2 = $2,000 / (1 + 0.06)^2
• PV of Year 3 = $2,000 / (1 + 0.06)^3
• PV of Year 4 = $2,000 / (1 + 0.06)^4

We then sum up all the present values to get the total effective price received for the car. To illustrate how the discount rate effects the present value, consider the provided example of a two-year bond example and the effect of changing the discount rate on the present value of its payments.