Question

1. Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment. Compute the present value of the cash inflows for each investment using a 20% discount rate.

Year	Investment X	Investment Y
1	$500	2,000
2	1,000	1,500
3	1,500	1,000
4	2,000	5,00
Total	$5,000	$5,000

2. At the end of three years, when you graduate from college, your father has promised to give you a used car that will cost $22,000. What lump sum must he invest now to have the $22,000 at the end of three years if he can invest money at
   1. 5%
   2. 8%

Answer 1

Investment X:

Year	Cash flow	× PV factor	Present value
1	500	0.83333	416.67
2	1,000	0.69444	694.44
3	1,500	0.57870	868.06
4	2,000	0.48225	964.51
Present value			2,943.67

Investment Y:

Year	Cash flow	× PV factor	Present value
1	2,000	0.83333	1,666.67
2	1,500	0.69444	1,041.67
3	1,000	0.57870	578.70
4	500	0.48225	241.13
Present value			3,528.16

At 5%:

Present value of money:	=	FV/ (1+r) ^N
Future value	FV=	$               22,000
Rate of interest	r=	5%
Number of years	N=	3
Present value	=	22000/ (1+0.05)^3
	=	$         19,004.43

Investment at 5% now is $19,004.43

At 8%

Present value of money:	=	FV/ (1+r) ^N
Future value	FV=	$               22,000
Rate of interest	r=	8%
Number of years	N=	3
Present value	=	22000/ (1+0.08)^3
	=	$         17,464.31

Investment now at 8% is 17,464.31

please rate.