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

Question

Investment X offers to pay you $4,400 per year for 9 years, whereas Investment Y offers to pay you $6,500 per year for 5 years. If the discount rate is 5 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Present value nvestment X Investment Y If the discount rate is 15 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Present value Investment X Investment Y

Explanation / Answer

a. Present Value Investment X $ 31,274.42 Investment Y $ 28,141.60 Working: Investment X: Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.05)^-9)/0.05 i 5% =              7.108 n 9 Present Value of annual cash flow = Annual Cash flow x Present value of annuity of 1 = $         4,400 x         7.108 = $ 31,274.42 Investment Y: Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.05)^-5)/0.05 i 5% =              4.329 n 5 Present Value of annual cash flow = Annual Cash flow x Present value of annuity of 1 = $         6,500 x         4.329 = $ 28,141.60 b. Present Value Investment X $ 20,994.97 Investment Y $ 21,789.01 Working: Investment X: Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.15)^-9)/0.15 i 15% =              4.772 n 9 Present Value of annual cash flow = Annual Cash flow x Present value of annuity of 1 = $         4,400 x         4.772 = $ 20,994.97 Investment Y: Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.15)^-5)/0.15 i 15% =              3.352 n 5 Present Value of annual cash flow = Annual Cash flow x Present value of annuity of 1 = $         6,500 x         3.352 = $ 21,789.01

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