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a. The value of the cash flow today is the present value of $500 per year for 20 years discounted at 8.5%. Since $500 remains the same each year, the cash flows are in the nature of an annuity and we have to find the present value of annuity. We use the PV of annuity formula to calculate the value of cash flow today.
PV of annuity = PMT [(1 - (1 / (1 + i)^n)) / i]
PMT = annuity amount = $500
i = interest rate = 8.5%
n = time period = 20 years
PV of annuity = 500 [(1-(1/(1+8.5%)^20))/8.5%]
= 500 X 9.4633
b. In this case ...
The solution explains two questions. Calculating the present value of cash flows and monthly repayment on a loan.