Question

Investment X offers to pay you $4,200 per year for eight years, whereas Investment Y offers to pay you $6,100 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is 15 percent?

Answer 1

Investment X

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 5%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 5% discount rate is $27,145.49.

Investment Y

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 5%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 5% discount rate is $26,409.81.

Therefore, investment X has the higher present value if the discount rate is 15%.

Investment X

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 15%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 15% discount rate is $18,846.75.

Investment Y

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 15%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 15% discount rate is $20,448.15.

Therefore, investment Y has the higher present value if the discount rate is 15%.

In case of any query, kindly comment on the solution.