Frank Zanca is considering three different investments that his broker has offer

Question

Frank Zanca is considering three different investments that his broker has offered to him. The different cash flows are as follows:

End of year A B C
1 300 400
2 300
3 300
4 300 300 600
5        300
6        300
7        300
8        300 600

Because Frank only has enough savings for one investment, his broker has proposed the third alternative to be, according to his expertise, "the best in town."However, Frank questions his broker and wants to calculate the present value of each investment. Assuming a 15% discount rate, what is Frank's best alternative?

Explanation / Answer

PV of A is

300 / 1.15 + ... + 300/1.15^8 = 1346.20

PV of B is 400/1.15 + 300/1.15^4 + 600/1.15^8 = 715.49

PV of C is 600/1.15^4 = 343.05

Hence A is the best option

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