Question

Annual cash inflows from two competing investment projects are given below:

Year Investment A Investment B
1 $ 9,000 $ 12,000
2 10,000 11,000
3 11,000 10,000
4 12,000 9,000
$ 42,000 $ 42,000

The discount rate is 6%.
Required:
Compute the present value of the cash inflows for each investment. Each investment opportunity will require the same initial investment.

Answer 1

To calculate the present value of each investment, we need to discount the future cash flows using the discount rate of 6%. The present value of the cash inflows for Investment A is $35,997.17 and for Investment B is $37,058.83.

Step-by-step explanation:

To calculate the present value of each investment, we need to discount the future cash flows to their present value using the discount rate of 6%.

For Investment A:

• Year 1: $9,000 / (1+0.06)^1 = $8,490.57
• Year 2: $10,000 / (1+0.06)^2 = $8,798.03
• Year 3: $11,000 / (1+0.06)^3 = $9,153.09
• Year 4: $12,000 / (1+0.06)^4 = $9,555.48

For Investment B:

• Year 1: $12,000 / (1+0.06)^1 = $11,320.75
• Year 2: $11,000 / (1+0.06)^2 = $9,959.68
• Year 3: $10,000 / (1+0.06)^3 = $8,866.25
• Year 4: $9,000 / (1+0.06)^4 = $7,912.15

Therefore, the present value of the cash inflows for Investment A is $35,997.17 and for Investment B is $37,058.83.