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You are given three investment alternatives to analyze. The cash flows from thes

ID: 2621999 • Letter: Y

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                      10,000                                                      10,000

2                       10,000

3                       10,000

4                       10,000

5                        10,000                10,000

6                                                     10,000                       50,000

7                                                     10,000

8                                                      10,000

9                                                      10,000

10                                                    10,000                     10,000


Assuming a 20 percent discount rate, find the present value of each investment.

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

A:

Present value=10000/1.2+10000/1.2^2+10000/1.2^3+10000/1.2^4+10000/1.2^5

=10000[1/1.2+1/1.2^2+............+1/1.2^5]

=(10000*2.99061214)

=$29906.12(Approx)

B:

Present value=10000/1.2^5+10000/1.2^6+..........+10000/1.2^10

=10000[1/1.2^5+1/1.2^6+...........+1/1.2^10

=(10000*1.603737518)

=$16037.38(Approx)

C:

Present value=10000/1.2+50000/1.2^6+10000/1.2^10

=$26693.29(Approx).

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