Question

You are considering two investment options. In option A, you have to invest $4500 now and $1000 three years from now. In option B, you have to invest $3500 now, $1000 a year from now, and $1000 three years from now. In both options, you will receive four annual payments of $2000 each (you will get You are considering two investment options. In option A, you have to invest $4500 now and $1000 three years from now. In option B, you have to invest $3500 now, $1000 a year from now, and $1000 three years from now. In both options, you will receive four annual payments of $2000 each (you will get the first $2000 payment a year from now). Which of these two options would you choose based on the present worth criterion? Assume the interest rate is 10%.

Answer 1

Option B

Step-by-step explanation:

The net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be found using a financial calculator.

For option A,

Cash flow in year 0 = -4500

Cash flow each year in year 1,2 and 4 = 2000

Cash flow in year 3 = 1000

I = 10%

NPV = $1,088.42

For option B,

Cash flow in year zero = -3500

Cash flow each year in year 1 and 3 = 1000

Cash flow in year 2 and 4 = 2000

I = 10%

NPV = $1,179.33

Choose the second option because its present value is greater than the first option.

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you