A company has two investment possibilities, with the following cash inflows: Investment Year 1 Year 2...

A company has two investment possibilities, with the following cash inflows: Investment Year 1 Year 2 Year 3 A $1,600 1,800 2,000 B $1,200 1,200 1,200 If the firm can earn 7 percent in other investments, what is the present value of investments A and B? Use Appendix B and Appendix D to answer the question. Round your answers to the nearest dollar. PV(Investment A): $ PV(Investment B): $ If each investment costs $4,000, is the present value of each investment greater than the cost of the investment? The present value of investment A is -Select- the cost. The present value of investment B is -Select- the cost.

Expert Solution

Calculate present value of cash flow for investment A

Present value	Cash flow*Present value of $1(i=7%, n)

Year	Cash flow	Discount factor @ 7%	Present value
1	$1,600	0.9346	$1,495.36
2	$1,800	0.8734	$1,572.12
3	$1,200	0.8163	$979.56
Total			$4,047.04
Thus, present value of investment A is $4,047.04

Calculate present value of cash flow for investment B

Present value	Cash flow*Present value of $1(i=7%, n)

Year	Cash flow	Discount factor @ 7%	Present value
1	$1,200	0.9346	$1,121.52
2	$1,200	0.8734	$1,048.08
3	$1,200	0.8163	$979.56
Total			$3,149.16
Thus, present value of investment B is $3,149.16

For investment A, the present value of investment cash flow is higher than costs
For investment B, the present value of investment cash flow is lower than costs

jeff jeffy answered 2 years ago

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