Investment X offers to pay you $4,500 per year for 9 years, whereas Investment Y offers to pay you $6,200 per year for 5 years. a. If the discount rate is 7 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.) b. If the discount rate is 21 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.)

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Parrain Parrain · Answer 1 · 2020-10-07T00:22:22+02:00

Answer:

a.

Investment X.

Investment X offers to pay $4,500 per year for 9 years.

Discount rate of 7%

This is therefore an annuity as it is a constant figure.

Present value = 4,500 * Present value Interest factor for 9 years, 7%

= 4,500 * 6.5152

= $‭29,318.4‬0

Investment Y

Present Value = 6,200 * Present value Interest factor for 5 years, 7%

= 6,200 * 4.1002

= $‭25,421.24‬

b. Investment X

Discount rate is 21%.

Use Present Value of Annuity formula as attached table does not have factor for 21%.

[tex]Present Value = Annuity * \frac{1 - (1 + rate)^{-no. of periods} }{rate} \\\\= 4,500 * \frac{1 - (1 + 0.21)^{-9} }{0.21} \\\\= $17,574.45[/tex]

= $17,574.45

Investment Y

[tex]Present Value = Annuity * \frac{1 - (1 + rate)^{-no. of periods} }{rate} \\\\= 6,200 * \frac{1 - (1 + 0.21)^{-5} }{0.21} \\\\= $18,141.10[/tex]

= $18,141.10