Question

A firm must choose between two investment alternatives, each costing $105,000. The first alternative generates $35,000 a year for four years. The second pays one large lump sum of $152,500 at the end of the fourth year. If the firm can raise the required funds to make the investment at an annual cost of 9 percent, what are the present values of two investment alternatives

Answer 1

Present Value of first option:

= -105,000 + 35,000/ (1 + 9%) + 35,000/(1 + 9%)² + 35,000/(1 + 9%)³ + 35,000/(1 + 9%)⁴

= -105,000 + 113,390.19

= $8,390.20

Present Value of second option:

= -105,000 + 152,500/ (1 + 9%)⁴

= -105,000 + 108,034.84

= $3,034.84