You are given three investment alternatives to analyze. The cash flows from thes
ID: 2621999 • Letter: Y
Question
You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:
End of Year A B C
1 10,000 10,000
2 10,000
3 10,000
4 10,000
5 10,000 10,000
6 10,000 50,000
7 10,000
8 10,000
9 10,000
10 10,000 10,000
Assuming a 20 percent discount rate, find the present value of each investment.
Explanation / Answer
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
A:
Present value=10000/1.2+10000/1.2^2+10000/1.2^3+10000/1.2^4+10000/1.2^5
=10000[1/1.2+1/1.2^2+............+1/1.2^5]
=(10000*2.99061214)
=$29906.12(Approx)
B:
Present value=10000/1.2^5+10000/1.2^6+..........+10000/1.2^10
=10000[1/1.2^5+1/1.2^6+...........+1/1.2^10
=(10000*1.603737518)
=$16037.38(Approx)
C:
Present value=10000/1.2+50000/1.2^6+10000/1.2^10
=$26693.29(Approx).
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