Question

5. Judy is offered two investment alternatives. If she chooses ALT 1, she will have to make an immediate outlay of $15,000. In return, she will receive $1200 at the end of every three months for the next ten years. If she chooses Alt 2, she will have to make an outlay of $7000 now and 7000 in two years. In return, she will receive $41,000 ten years from now. Interest is 12 % compounded semi-annually. Determine which investment should be accepted using the Net Present Value approach.

*Please use financial calculator method and show the values being entered for PY, CY, I, N, PMT, FV, PV along with your final answer*

Answer 1

formulas used :-

NPV(1) =PV(C611,C610,-C609)-C608

Here

CY= 2

I = 12%

N= 10 YEARS

PMT=1200

AND USE THE PV formula and deduct initial outlay from the present value.

Alternative (2)

present value of (t=2) cash flow=C617/(1+6%)^4
Present value of above=-PV(C611,C610,0,C619)

NPV(2) =C620-C618-C616

For the calculation of Present value

For payment after 2 years

FV= $7000

CY= 2

I= 12%

Tenure= 10 years

present value of amount received at the end of 10 years.

PV=? (Answer)

FV = 41000

CY=2

I = 12%

Tenure = 10 years.

Now let's combine all

the present value of alternative 2 and you will get the answer shown above in Excel sheet.

Alternative A is better because it have higher NPV