Question

investment x offers to pay you $4300 per year for 9 years,whereas investment y offers to pay you $6100 for 5 years. If the discount rate is 22 percent, what is the present value of these cash flows.

Answer 1

PV of Annuity:

Annuity is series of cash flows that are deposited at regular intervals for specific period of time.

PV of Annuity = Cash Flow * [ 1 - [(1+r)^-n]] /r
r - Int rate per period
n - No. of periods

PV of Investment X:

Particulars	Amount
Cash Flow	$            4,300.00
Int Rate	22.0000%
Periods	9

PV of Annuity = Cash Flow * [ 1 - [(1+r)^-n]] /r
= $ 4300 * [ 1 - [(1+0.22)^-9]] /0.22
= $ 4300 * [ 1 - [(1.22)^-9]] /0.22
= $ 4300 * [ 1 - [0.167]] /0.22
= $ 4300 * [0.833]] /0.22
= $ 16281.03

PV of Investment Y:

Particulars	Amount
Cash Flow	$            6,100.00
Int Rate	22.0000%
Periods	5

PV of Annuity = Cash Flow * [ 1 - [(1+r)^-n]] /r
= $ 6100 * [ 1 - [(1+0.22)^-5]] /0.22
= $ 6100 * [ 1 - [(1.22)^-5]] /0.22
= $ 6100 * [ 1 - [0.37]] /0.22
= $ 6100 * [0.63]] /0.22
= $ 17468.2