Investment X offers to pay you $6,700 per year for 9 years, whereas Investment Y

Question

Investment X offers to pay you $6,700 per year for 9 years, whereas Investment Y offers to pay you $9,200 per year for 5 years. Requirement 1 (a) If the discount rate is 6 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).) Present value Investment X Investment Y (b) Which of these cash flow streams has the higher present value at 6 percent? (Click to select) Requirement 2: (a) If the discount rate is 22 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).) Present value Investment X Investment Y (b) Which of these cash flow streams has the higher present value at 22 percent? (Click to select)

Explanation / Answer

Part 1: Interest 6%

Investment X:

N = 9 years

PMT = 6,700

I = 6%

Using Financial Calculator:

PV = 45,571.34

Investment Y:

N = 5 years

PMT = 9,200

I = 6%

Using Financial Calculator:

PV = 38,753.75

Investment X has higher present value at 6%

Part 2: Interest 22%

Investment X:

N = 9 years

PMT = 6,700

I = 22%

Using Financial Calculator:

PV = 25,368.11

Investment Y:

N = 5 years

PMT = 9,200

I = 6%

Using Financial Calculator:

PV = 26,345.49

Investment Y has higher present value at 22%

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