Investment X offers to pay you $5,500 per year for 11 years, whereas Investment

Question

Investment X offers to pay you $5,500 per year for 11 years, whereas Investment Y offers to pay you $6,800 per year for 7 years.

Requirement 1:

(a)

Assume the discount rate is 8 percent, what is the present value of these cash flows? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

  Present value
  Investment X $    
  Investment Y $    

(b) Which of these cash flow streams has the higher present value?


(Click to select)
Investment Y
Investment X

Requirement 2:

(a)

Assume the discount rate is 20 percent, what is the present value of these cash flows? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

  Present value
  Investment X $    
  Investment Y $    

(b) Which of these cash flow streams has the higher present value?


(Click to select)
Investment X
Investment Y

Explanation / Answer

Requirement 1

(a) Investment X

Amount received each year, x= $ 5500; Discount Rate, r = 8%; Time, t= 11 years

By using NPV Formula= x/(1+r) + x/(1+r)2 + .. ...... + x/(1+r)t

We get NPV for project X as NPV(X)= $ 39,264.30

Similarly For Investment Y which has amount received each year, y = $6,800 & time t= 7 years

So we get NPV(Y)= $ 35,403.31

(b) So Investment X has higher Present Value

Requirement 2

Now the discount rate, r = 20% rest remaining the same.

So NPV(x)= $23,798.83 & NPV(y)= $ 24,511.22

Hence Investment Y has higher Present Value

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