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27 June, 15:25

Investment X offers to pay you $4,300 per year for 9 years, whereas Investment Y offers to pay you $6,100 per year for 5 years. a. If the discount rate is 6 percent, what is the present value of these cash flows?

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  1. 27 June, 15:56
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    Present value of investment X=$29,247.28

    Present value of investment Y=$25,695.42

    Explanation:

    Since the investment X is paying the $4,300 per year for the period of the 9 years, therefore, the present value of the cash flows pertaining to the investment X shall be determined through present value of annuity formula as follows:

    Present value of investment X=R[1 - (1+i) ^-n/i}

    Where

    R=amount that investment X is giving per year=$4,300

    i = Interest rate per year=6%

    n=number of years=9

    Present value of investment X=$4,300[1 - (1+6%) ^-9/6%}=$29,247.28

    Since the investment Y is paying the $6,100 per year for the period of the 5 years, therefore, the present value of the cash flows pertaining to the investment Y shall be determined through present value of annuity formula as follows:

    Present value of investment Y=R[1 - (1+i) ^-n/i}

    Where

    R=amount that investment Y is giving per year=$6,100

    i = Interest rate per year=6%

    n=number of years=5

    Present value of investment Y=$6,100[1 - (1+6%) ^-5/6%}=$25,695.42
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