Question

The following cash flow transactions are said to be equivalent in terms of economic desirability at an interest rate of 10% compounded annually. 750 -> BUU 450 300 150 0 1 2 3 4 5 0 1 2 3 4 5 The unknown value A is close to Note: Asking questions in this manner is common in economics. What is implied is that the value of the cash flow on the left is the same as the value of the cash flow on the right (as long as these values are evaluated at the same time). Select one: $530 $494 $472 $501

Answer 1

Ans: $501

Explanation:

Here, A1 = 150, G = 150 , i = 10%,

PW = [150 + 150(A/G, 10%, 5)] (P/A, 10%, 5)

       = [150 + 150(1.810)] (3.791)

       = 1,597.82

A = PW(A/P, i, n)

   = 1,597.82(A/P, 10%, 4)

   = 1,597.82(0.3155)

   = $504

Since the calculated value is approaching $501, therefore, the answer is $501.