Question

Investment X offers to pay you $6,100 per year for nine years, whereas Investment Y offers to pay you $8,800 per year for five years.

  

a.	Calculate the present value for Investments X and Y if the discount rate is 5 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b.	Calculate the present value for Investments X and Y if the discount rate is 15 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

    

Answer 1

a.				Investment X		Investment Y
	Present Value			$    43,357.71		$ 38,099.39
	Working:
				Investment X			Investment Y
	Year	Discount factor		Cash flow	Present value of cash flow		Cash flow	Present value of cash flow
	a	b=1.05^-a		c	d=c*b		e	f=e*b
	1	0.952381		$            6,100	$            5,809.52		$             8,800	$         8,380.95
	2	0.907029		6,100	5,532.88		8,800	7,981.86
	3	0.863838		6,100	5,269.41		8,800	7,601.77
	4	0.822702		6,100	5,018.49		8,800	7,239.78
	5	0.783526		6,100	4,779.51		8,800	6,895.03
	6	0.746215		6,100	4,551.91
	7	0.710681		6,100	4,335.16
	8	0.676839		6,100	4,128.72
	9	0.644609		6,100	3,932.11
		Total			$         43,357.71			$       38,099.39
b.				Investment X		Investment Y
	Present Value			$    29,106.66		$ 29,498.96
	Working:
				Investment X			Investment Y
	Year	Discount factor		Cash flow	Present value of cash flow		Cash flow	Present value of cash flow
	a	b=1.15^-a		c	d=c*b		e	f=e*b
	1	0.869565		$            6,100	$            5,304.35		$             8,800	$         7,652.17
	2	0.756144		6,100	4,612.48		8,800	6,654.06
	3	0.657516		6,100	4,010.85		8,800	5,786.14
	4	0.571753		6,100	3,487.69		8,800	5,031.43
	5	0.497177		6,100	3,032.78		8,800	4,375.16
	6	0.432328		6,100	2,637.20
	7	0.375937		6,100	2,293.22
	8	0.326902		6,100	1,994.10
	9	0.284262		6,100	1,734.00
		Total			$         29,106.66			$       29,498.96