Question

Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments?
Year Investment X Investment Y
1 $5,000 $11,000
2 $7,000 $9,000
3 $9,000 $7,000
4 $11,000 $5,000

A. Investment X has a higher present value.
B. Investment Y has a higher present value.
C. Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both.
D. No comparison can be made - we need to know the interest rate to calculate the present value.

Answer 1

Answer:

B. Investment Y has a higher present value.

Explanation:

The cash inflows are given in the question for Investment X and Investment Y

Plus we know that the cash inflows and the number of years has an indirect relation

That means if the cash flows are the same for year 1 and 2 and in year 3 and year 4 so year 1 and year 2 present value would be higher as compared with the last year present value

Since in the question Investment Y has higher cash inflows in starting year but in Investment X has higher cash inflows in last year that interprets Investment Y has a higher present value