contestada

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?

Respuesta :

Edufirst

Answer:

  • The cash flow stream from investment X has higher present value than the the cash flow stream from investm Y.

Explanation:

1. Present value of investment X

  • Annual payment: C = $4,200
  • Number of years: t = 8
  • Rate: r = 5%
  • PV₁ = ?

Formula:

           [tex]PV=C\times [\dfrac{1}{r}-\dfrac{1}{r(1+r)^t}][/tex]

Substitute and compute:

        [tex]PV_1=\$ 4,200\times [\dfrac{1}{0.05}-\dfrac{1}{0.05(1+0.05)^8}][/tex]

        [tex]PV_1=\$ 27,145.49[/tex]

2. Present value of investment Y

  • Annual payment: C = $6,100
  • Number of years: t = 5
  • Rate: r = 5%

Formula:

           [tex]PV=C\times [\dfrac{1}{r}-\dfrac{1}{r(1+r)^t}][/tex]

Substitute and compute:

        [tex]PV_2=\$ 6,200\times [\dfrac{1}{0.05}-\dfrac{1}{0.05(1+0.05)^5}][/tex]

        [tex]PV_2=\$ 26,409.81[/tex]

Hence, the cash flow stream from investment X has higher present value than the the cash flow stream from investm Y.

Otras preguntas