Question

You are given three investment alternatives to analyze. The cash flows from these three investments are as​ follows:

End of year	a	b	c
1	$1,000	$2,000	$6,000
2	2,000	2,000	6,000
3	3,000	2,000	(6,000)
4	(4,000)	2,000	(6,000)
5	4,000	5,000	16,000

What is the present value of each of these three investments if the appropriate discount rate is 9 percent?

Answer 1

Inv a
Discount rate	0.09
Year	0	1	2	3	4	5
Cash flow stream	0	1000	2000	3000	-4000	4000
Discounting factor	1	1.09	1.1881	1.295029	1.4115816	1.538624
Discounted cash flows project	0	917.4312	1683.36	2316.55	-2833.701	2599.726
NPV = Sum of discounted cash flows
NPV Inv a =	4683.37
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Inv b
Discount rate	0.09
Year	0	1	2	3	4	5
Cash flow stream	0	2000	2000	2000	2000	5000
Discounting factor	1	1.09	1.1881	1.295029	1.4115816	1.538624
Discounted cash flows project	0	1834.862	1683.36	1544.367	1416.8504	3249.657
NPV = Sum of discounted cash flows
NPV Inv b =	9729.1
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Inv c
Discount rate	0.09
Year	0.00%	1	2	3	4	5
Cash flow stream	0	6000	6000	-6000	-6000	16000
Discounting factor	1	1.09	1.1881	1.295029	1.4115816	1.538624
Discounted cash flows project	0	5504.587	5050.08	-4633.1	-4250.551	10398.9
NPV = Sum of discounted cash flows
NPV Inv c =	12069.92
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor