Answer:
the investment with the interest rate of 5.5% has the higher price today.
The investment that matures in 6 years has the lower price.
Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.
Explanation:
Present value is the sum of discounted cash flows.
To determine which investment would have the greater price today, one has to calculate the present value of the investments.
Present value can be calculated using a financial calculator.
For the first investment,
Cash flow from year 1 to 4 = 0
Cash flow in year 5 = $18,500
Interest rate = 5.50%
Present value = $14,154.99
For the second investment,
Cash flow from year 1 to 4 = 0
Cash flow in year 5 = $18,500
Interest rate = 8.50%
Present value = $12,303.34
From the calculation, the investment with the interest rate of 5.5% has the higher present value. So, the investment with the interest rate of 5.5% has the higher price today.
2. To determine which investment option has a lower price today, find the present value of the two options.
The present value of the investment that matures in 5 years is $674.32
The present value of the investment that matures in 6 years is $623.21
The investment that matures in 6 years has the lower price.
From the above calculations, as years increase, the present value and price of an investment falls.
To find the PV 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
