Question

Investment X offers to pay you $5,200 per year for 9 years, whereas Investment Y offers to pay you $7,500 per year for 5 years. If the discount rate is 5 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 15 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.)

Answer 1

Instructions are listed below

Step-by-step explanation:

Giving the following information:

Investment X offers to pay you $5,200 per year for 9 years, whereas Investment Y offers to pay you $7,500 per year for 5 years.

First, we need to determine the final value to determine the present value:

FV= {A*[(1+i)^n-1]}/i

A= annual payment

PV= FV/(1+i)^n

A) i= 5%

Investment X:

FV= {5200*[(1.06^9)-1]}/0.06= $59,754.84

PV= 59,754.84/ 1.06^9= $35,368.80

Investment Y:

FV= {7500*[(1.06^5)-1]}/0.06= $42,278.20

PV= 42,278.20/1.06^5= $31,592.73

B) i= 15%

Investment X:

FV= {5200*[(1.15^9)-1]}/0.15= $87,286.38

PV= 87,286.38/ 1.15^9= $24,812.24

Investment Y:

FV= {7500*[(1.15^5)-1]}/0.15= $50,567.86

PV= 50,567.86/1.15^5= $25,141.16