Investment X offers to pay you $7,900 per year for 9 years, whereas Investment Y

Question

Investment X offers to pay you $7,900 per year for 9 years, whereas Investment Y offers to pay you $10,800 per year for 5 years.

If the discount rate is 8 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).)

Investment X:

Investment Y:

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

If the discount rate is 20 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).)

Investment X

Investment Y

Investment X offers to pay you $7,900 per year for 9 years, whereas Investment Y offers to pay you $10,800 per year for 5 years.

Requirement 1: (a)

If the discount rate is 8 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).)

Investment X:

Investment Y:

(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? (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).)

Investment X

Investment Y

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

Explanation / Answer

Present value of cash flows is sum of each year cash flow multiplied with respective year present value factor.

b) Investment X has  more cash flows than Investment Y

Requirement 2.If Discount rate is 20%

a)

Computation of Present value Investments

Investment X

b) Investment Y has  more cash flows than Investment X

Investment X Year Cash flows PVF@8% PV 1 $     7,900 0.926 $ 7,314.81 2 $     7,900 0.857 $ 6,772.98 3 $     7,900 0.794 $ 6,271.27 4 $     7,900 0.735 $ 5,806.74 5 $     7,900 0.681 $ 5,376.61 6 $     7,900 0.630 $ 4,978.34 7 $     7,900 0.583 $ 4,609.57 8 $     7,900 0.540 $ 4,268.12 9 $     7,900 0.500 $ 3,951.97 Present value of cash flows $49,350.41

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