Question

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

year investment a investment b
1 $ 3,000 $ 12,000
2 $ 6,000 $ 9,000
3 $ 9,000 $ 6,000
4 $ 12,000 $ 3,000
tiotal $ 30,000 $ 30,000

the discount rate is 18%.
required: compute the present value of the cash inflows for each investment.

Answer 1

The present value of cash inflows for investment A are $2,542.37, $4,951.08, $7,740.19, and $9,705.29 for years 1-4 respectively. For investment B, the present value of cash inflows are $10,169.49, $6,678.03, $4,648.62, and $1,956.96 for years 1-4 respectively.

Step-by-step explanation:

To compute the present value of the cash inflows for each investment, we use the formula:

Present Value = Cash Inflow / (1 + Discount Rate) ^ Year

For investment A, the present value for each year would be:

Year 1: $3,000 / (1 + 0.18) ^ 1 = $2,542.37

Year 2: $6,000 / (1 + 0.18) ^ 2 = $4,951.08

Year 3: $9,000 / (1 + 0.18) ^ 3 = $7,740.19

Year 4: $12,000 / (1 + 0.18) ^ 4 = $9,705.29

For investment B, the present value for each year would be:

Year 1: $12,000 / (1 + 0.18) ^ 1 = $10,169.49

Year 2: $9,000 / (1 + 0.18) ^ 2 = $6,678.03

Year 3: $6,000 / (1 + 0.18) ^ 3 = $4,648.62

Year 4: $3,000 / (1 + 0.18) ^ 4 = $1,956.96