Problem 5-2 Present Value and Multiple Cash Flows [LO 1] Investment X offers to

Question

Problem 5-2 Present Value and Multiple Cash Flows [LO 1]

Investment X offers to pay you $4,300 per year for 9 years, whereas Investment Y offers to pay you $6,100 per year for 5 years.

If the discount rate is 6 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

If the discount rate is 22 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Net Present Value

The net cash flows are determined and they are discounted back to present values. The project with the highest net present value is selected.

Formula for computing net present value:

NPV=CF0+CF1/1+r)^1+ CF2/1+r)^2……+ CFn/1+r)^n= CFt/(1+r)^t

Where:

CF0= Initial cash investment

CFt= Cash flow in each year

r= Interest rate

This can also be calculated using a financial calculator by inputting the below:

1.Investment X

Given:

Cash flow= $4,300

Time period= 9 years

Interest rate=6%

Net Present Value= $29,247.28

Investment Y

Given:

Cash flow= $6,100

Time period= 5 years

Interest rate=6%

Net Present Value= $25,695.42

2. Investment X

Given:

Cash flow= $4,300

Time period= 9 years

Interest rate=22%

Net Present Value=$16,281.03

Investment Y

Given:

Cash flow= $6,100

Time period= 5 years

Interest rate=22%

Net Present Value= $17,468.20

I hope that was helpful :)

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