Question

Investment X offers to pay you $4,800 per year for 9 years, whereas Investment Y offers to pay you $7,100 per year for 5 years. If the discount rate is 6 percent, what is the present value of these cash flows

Answer 1

Answer and Explanation:

The computation is shown below:

Present value of investment X is

= Annuity × [1 - 1 ÷ (1 + r)^n] ÷ r

= $4,800 × [1 - 1 / (1 + 0.06)^9] ÷ 0.06

= $4,800 * 6.801692

= $32,648.12

And,

The Present value of investment Y is

= Annuity × [1 - 1 ÷ (1 + r)^n] ÷ r

= $7,100 × [1 - 1 ÷ (1 + 0.06)^5] ÷ 0.06

= $7,100 × 4.212364

= $29,907.78