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den301095 [7]
3 years ago
7

Investment X offers to pay you $4,200 per year for eight years, whereas Investment Y offers to pay you $6,100 per year for five

years.
a. Calculate the present value for Investment X and Y if the discount rate is 5 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)b. Calculate the present value for Investment X and Y if the discount rate is 15 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Business
1 answer:
marishachu [46]3 years ago
7 0

Answer:

PVxa = $27,132.00, PVya = $26,413.00,

Explanation:

Present value (PV) is the value of the future expected cash flow. PV rests on the idea that the worth of a cash received is more than that of the cash promised to be received in the future. To calculate PV a stream of incomes to be received a number of period in the future, the following formula is used:

PV = C[\frac{1-(1+r)^{-n} }{r} ]

Where PV = present value

C = cash flow amount from the investment

r = discount rate

n = number of period, in this case years, to receive the cash flow.

The PV formula above is therefore employed to answer the question as follows:

<u>Answer to question (a) </u>

<em>For Investment X in question (a)</em>

PVxa = $4,200 * {[1-(1+r)^-n]/r}

PVxa = $4,200 * {[1-(1+0.05)^-8]/0.05}

PVxa = $4,200 * 6.463212759

PVxa = $27,145.49      

<em>For Investment Y in question (a)</em>

PVya = $6,100*{[1-(1+r)^-n]/r}

PVya = $6,100*{[1-(1+0.05)^-5]/0.05}

PVya = $6,100 * 4.329476671

PVya = $26,409.81  

<u>Answer to question (b) </u>

<em>For Investment X in question (b)</em>

PVxb = $4,200 * {[1-(1+r)^-n]/r}

PVxb = $4,200 * {[1-(1+0.15)^-8]/0.15}

PVxb = $4,200 * 4.487321508

PVxb = $18,846.75  

<em>For Investment Y in question (b)</em>

PVyb = $6,100*{[1-(1+r)^-n]/r}

PVyb = $6,100*{[1-(1+0.15)^-5]/0.15}

PVyb = $6,100 * 3.352155098

PVyb = $20,448.15  

Where PVxa, PVya, PVxb and PVyb represents PV for X and Y in questions (a) and (b).

Decisions:

1. In question (a) part where the PV of $27,145.49 of X is greater than $26,409.81 of investment Y, it is better to invest on investment X.

2. In question (b) part where the PV of $20,448.15 of Y is now greater than $18,846.75 of investment X, it is better to invest on investment Y.

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From the problem statement it is clear that here we need to find out simple interest rate. 
One do not get interest on any investment made at the end of tenure.  
Putting this mathematically:
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The minimum academic qualifications for becoming and equal opportunity officer is a Bachelors degree.

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