Question

Investment X offers to pay you £6,000 per year for nine years, whereas Investment Y offers to pay you £8,000 per year for six years. (Do not round intermediate steps. Round your answers to 2 decimal places (e.g., 32.16). The program includes a margin of error of +/- 1%.)

    

Requirement 1:
Which of these cash flow streams has the higher present value if the discount rate is 5 per cent?
Investment Y has the higher present value of	£

     

Requirement 2:
Which of these cash flow streams has the higher present value if the discount rate is 15 per cent?
Investment X has the higher present value of	£

References

Answer 1

Requirement 1:

PV of cashflows from Investment X @ 5% discount rate

Year	Cash flow	PV factor @ 5%	PV of cashflow
1	£         6,000.00	0.9524	£          5,714.29
2	£         6,000.00	0.9070	£          5,442.18
3	£         6,000.00	0.8638	£          5,183.03
4	£         6,000.00	0.8227	£          4,936.21
5	£         6,000.00	0.7835	£          4,701.16
6	£         6,000.00	0.7462	£          4,477.29
7	£         6,000.00	0.7107	£          4,264.09
8	£         6,000.00	0.6768	£          4,061.04
9	£         6,000.00	0.6446	£          3,867.65
			£        42,646.93

PV of cashflows from Investment Y @ 5% discount rate

Year	Cash flow	PV factor @ 5%	PV of cashflow
1	£         8,000.00	0.9524	£          7,619.05
2	£         8,000.00	0.9070	£          7,256.24
3	£         8,000.00	0.8638	£          6,910.70
4	£         8,000.00	0.8227	£          6,581.62
5	£         8,000.00	0.7835	£          6,268.21
6	£         8,000.00	0.7462	£          5,969.72
			£        40,605.54

Investment X has a higher present value of £ 42,646.93.

Requirement 2:

PV of cashflows from Investment X @ 15% discount rate

Year	Cash flow	PV factor @ 15%	PV of cashflow
1	£         6,000.00	0.8696	£          5,217.39
2	£         6,000.00	0.7561	£          4,536.86
3	£         6,000.00	0.6575	£          3,945.10
4	£         6,000.00	0.5718	£          3,430.52
5	£         6,000.00	0.4972	£          2,983.06
6	£         6,000.00	0.4323	£          2,593.97
7	£         6,000.00	0.3759	£          2,255.62
8	£         6,000.00	0.3269	£          1,961.41
9	£         6,000.00	0.2843	£          1,705.57
			£        28,629.50

PV of cashflows from Investment Y @ 15% discount rate

Year	Cash flow	PV factor @ 15%	PV of cashflow
1	£         8,000.00	0.8696	£          6,956.52
2	£         8,000.00	0.7561	£          6,049.15
3	£         8,000.00	0.6575	£          5,260.13
4	£         8,000.00	0.5718	£          4,574.03
5	£         8,000.00	0.4972	£          3,977.41
6	£         8,000.00	0.4323	£          3,458.62
			£        30,275.86

Investment Y has a higher present value of £ 30,275.86.