Frank Zinc is considering three separate and distinct investment opportunities t

Question

Frank Zinc is considering three separate and distinct investment opportunities that his broker has offered to him, listed below as A. B. and C. The different cash flows for each are as follows: Because Frank only has enough savings for one investment, his broker has proposed the third alternative to b according to his expertise, "the best in town." However. Frank questions his broker and wants to calculate the present value of each investment. Assuming a 15% discount rate, calculate the present value of the revenues from each alternative, and identify what is Frank's best alternative (and why)?

Explanation / Answer

Investment A

Present Value = $200 x Present value interest factor of annuity(PVIFA) [15%, 4 years]
Present Value = $200 x 2.85498
Present Value = $570.996

Investment B
Present Value = $200 in beginning at the end of the fourth year, 5 years, 15%
Present Value = $200 × Present value interest factor of annuity(PVIFA) [15%, 8 years] - $200 × PVIFA [15%, 3 years]
Present Value = $200 x 4.48732 - $200 x 2.28323
Present Value = $897.464 - $456.646
Present Value = $440.818

Investment C
Present Value = ($200,1 year, 15%) + ($500, 4 years 15%) + ($600, 8 years, 15%)
Present Value = $200 X 0.86957 + $500 X 0.57175 +$600 x 0.32690
Present Value = $173.914+ $285.875+ $196.14
Present Value = $655.929

Investment C is the best as it has the highest NPV.

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