You have to choose between 2 investments, The first investment requires you to p

Question

You have to choose between 2 investments, The first investment requires you to pay $1,989,453 three years from now, but it will earn you cash flow every year from the 2nd year to the 6th year; starting with $129,827 on the 2nd year, and this will grow 5% per year for 3 years: plus, you'll get back a lump sum of $1,639,837 on the 6th year The second investment requires you to pay only $1,873,963 today, and then you'll earn $423,296 beginning 1 year from now and this will continue until the 5th year. Government bond rate stands at 2.3% You can afford either investment, but can only choose one. With the NPV concept, which is a better investment for you, and by how much is it better?

Explanation / Answer

Hello Sir/ Mam

Computation of Present Values of both the investments:

Hence, INVESTMENT 2 IS BETTER BY $15,325.56.

I hope this solves your doubt.

Feel free to comment if you still have any query.

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Investment 1 Investment 2 Years PVF Cashflows Present Values Cashflows Present Values 0 1.000000 $0.00 $0.00 -$1,873,963.00 -$1,873,963.00 1 0.977517 $0.00 $0.00 $423,296.00 $413,779.08 2 0.955540 $129,827.00 $124,054.85 $423,296.00 $404,476.13 3 0.934056 -$1,853,134.65 -$1,730,932.27 $423,296.00 $395,382.34 4 0.913056 $143,134.27 $130,689.62 $423,296.00 $386,493.00 5 0.892528 $150,290.98 $134,138.90 $423,296.00 $377,803.52 6 0.872461 $1,639,837.00 $1,430,694.41 $0.00 $0.00 Total NPV $88,645.50 $103,971.06

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