5.1: Investment X offers to pay you $4,900 per year for 9 years, whereas Investm

Question

5.1: Investment X offers to pay you $4,900 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? (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

If the discount rate is 23 percent, what is the present value of these cash flows? (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Explanation / Answer

a) scheme X = P = 4900/0.05 [1-1/((1.05)^9] = 34828.32

scheme Y = P = 6500/0.05 [1-1/((1.05)^5] = 28141.59

Scheme X has higher present value

b)scheme X = P = 4900/0.23 [1-1/((1.23)^9] = 17998.20

scheme Y = P = 6500/0.23 [1-1/((1.23)^5] = 18222.57

Scheme Y has higher present value

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