2. Frank Zanca is considering three different investments that his broker has of

Question

2. Frank Zanca is considering three different investments that his broker has offered to him. The different cash flows are as follows: (4 points)

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 has enough savings for only 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 estimate the present value of each investment. Assuming a 15% discount rate, what is Frank's best alternative?

Explanation / Answer

Present value of A =300/1.15 + 300/1.15^2 + 300/1.15^3 + 300/1.15^4 + 300/1.15^5 + 300/1.15^6 + 300/1.15^7 + 300/1.15^8

=$1346.20

Present value of B = 400/1.15 + 300/1.15^4 +600/1.15^8=$715.49

Present value of C = 600/1.15^4=$343.05

A is the best alternative

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