You sold your motorcycle 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 1 2 3 4
Cashflows $0 $1,000 $2,000 $2,000 $2,000
a) $6, 600
b) $7, 277,
c) $5, 987,
d) $6, 930,
e) $6, 286

The Answer is C. $5,987

Explanation:

Present value = Cash flow/(1+r)^n

where n is the number of years

r is the rate of return and it is 6%

Cash flow 0:

$0/1.06^0

=$0

Cash flow 1:

$1,000/1.06^1

=$943

Cash flow 2:

$2000/1.06^2

=$1,780

Cash flow 3::

$2,000/1.06^3

=$1,679

Cash flow 4:

$2,000/1.06^4

=$1,584

Present Value of all the cash flows is

$0 +$943 +$1,780 +$1,679+$1,584

=$5,987

income increases, enabling consumers to buy more goods and services. ( c.)

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