Investment X offers to pay you $5,700 per year for 9 years, whereas Investment Y
ID: 2645430 • Letter: I
Question
Investment X offers to pay you $5,700 per year for 9 years, whereas Investment Y offers to pay you $7,500 per year for 5 years.
If the discount rate is 5 percent, what is the present value of these cash flows? (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
If the discount rate is 23 percent, what is the present value of these cash flows? (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
If the discount rate is 5 percent, what is the present value of these cash flows? (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
If the discount rate is 23 percent, what is the present value of these cash flows? (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Which of these cash flow streams has the higher present value at 23 percent?Explanation / Answer
a. Discount rate = 5%
Using excel formula, PV of 5,700 per year for 9 years = PV(5%,9,-5700) = $40,514.58
PV of 7,500 per year for 5 years = PV(5%,5,-7500) = $32,471.08
Investment X is better at 5% discount rate.
b. Discount rate = 23%
Using excel formula, PV of 5,700 per year for 9 years = PV(23%,9,-5700) = $20,936.68
PV of 7,500 per year for 5 years = PV(23%,5,-7500) = $21,026.05
Investment Y is better at 23% discount rate
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