Question

1. Mariana Pajón just hired your as her financial advisor. She has received two offers for cycling professionally and wants to select the best based only on money. Offer A is a $10m ($2m a year for 5 years). Offer B is $11m ($1m a year for four years and $7m in year 5). What is your advice? Use a 10% interest rate.

Answer 1

Based on the given data, pls find below workings and answer:

Have found out the Present Value of these future cash flows, to determine the comparative values to evaluate the choice between Offer A and Offer B;

Based on the workings, the Present Value of Offer A is $ 7581573.54 and Offer B is $ 7516314.71;

Since the Present value or Present Worth of Offer A is higher, the same should be selected;

factor% are considered same.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;