Answer:
The investment with the lowest Present Value is D= $936.86
Explanation:
Giving the following information:
Assume that the effective annual rate for all investments is the same and is greater than zero. We will assume an effective rate of 10%.
A) Investment A pays $250 at the end of every year for the next 10 years.
First, we need to find the final value.
FV= {A*[(1+i)^n-1]}/i
A= annual payment
FV= {250*[(1.10^10)-1]}/0.10= 3984.36
Now, we can find the present value.
PV= FV/(1+i)^n
PV= 3,984.36/1.10^10= $1,536.14
B) Investment B pays $125 at the end of every 6 months for the next 10 years.
FV= {125*[(1.05^20)-1]}/0.05= 4,133.24
PV= 4,133.24/(1.05^20)= 1,557.77
C) pays $125 at the beginning of every 6 months for the next 10 years
It is the same as B, but it generates interest for one more period.
PV= 1,557.77*1.05= 1,635.67
D) pays $2,500 at the end of 10 years
PV= 2500/1.10^10= $963.86
E) Investment E pays $250 at the beginning of every year for the next 10 years.
It is the same as A, but it generates interest for one more period.
PV= 1,536.14*1.10= $1,689.75
