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15 July, 04:38

Investment X offers to pay you $4,700 per year for 9 years, whereas Investment Y offers to pay you $6,400 per year for 5 years.

Requirement 1:

A. If the discount rate is 8 percent, what is the present value of these cash flows?

B. Which of these cash flow streams has the higher present value at 8 percent?

Requirement 2:

A) If the discount rate is 20 percent, what is the present value of these cash flows?

B) Which of these cash flow streams has the higher present value at 20 percent?

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Answers (1)
  1. 15 July, 05:35
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    Instructions are below.

    Explanation:

    Giving the following information:

    Investment X offers to pay you $4,700 per year for 9 years

    Investment Y offers to pay you $6,400 per year for 5 years.

    Requirement 1:

    First, we need to calculate the final value, using the following formula:

    FV = {A*[ (1+i) ^n-1]}/i

    A = annual cash flow

    Investment X:

    FV = {4,700*[ (1.08^9) - 1]} / 0.08

    FV = $58,691.52

    Investment Y:

    FV = {6,400*[ (1.08^5) - 1]} / 0.08

    FV = $37,546.25

    Now, the present value:

    PV = FV / (1+i) ^n

    Investment X:

    PV = 58,691.52 / (1.08^9)

    PV = $29,360.37

    Investment Y:

    PV = 37,546.25 / (1.08^5)

    PV = $25,553.35

    Investment X provides the higher present value, therefore, it should be the one to choose.

    Requirement 2:

    First, we need to calculate the final value, using the following formula:

    FV = {A*[ (1+i) ^n-1]}/i

    A = annual cash flow

    Investment X:

    FV = {4,700*[ (1.20^9) - 1]} / 0.20

    FV = $97,754.84

    Investment Y:

    FV = {6,400*[ (1.20^5) - 1]} / 0.20

    FV = $47,626.24

    Now, the present value:

    PV = FV / (1+i) ^n

    Investment X:

    PV = 97,754.84 / (1.20^9)

    PV = $18,945.54

    Investment Y:

    PV = 47,626.24 / (1.20^5)

    PV = $19,139.92

    Investment Y provides the higher present value, therefore, it should be the one to choose.
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