Question

Investment X offers to pay you $6,100 per year for 9 years, whereas Investment Y offers to pay you $8,700 per year for 5 years. If the discount rate is 5 percent, what is the present value of these cash flows

Answer 1

Answer:

Investment X PV=$43,357.71

Investment Y PV=$37,666.45  

Explanation:

The present value of future cash flows is the today's worth of those cash flows by virtue of discounting the cash flows to present time

The present value of a future cash flow=future cash flow/(1+discount rate)^n

n refers to the period in which the cash flow is expected , for instance,for year 1 cash flow n is 1, 2 for year 2 and so on.

Investment X:

PV=$6,100/(1+5%)^1+$6,100/(1+5%)^2+$6,100/(1+5%)^3+$6,100/(1+5%)^4+$6,100/(1+5%)^5+$6,100/(1+5%)^6+$6,100/(1+5%)^7+$6,100/(1+5%)^8+$6,100/(1+5%)^9=$43,357.71  

Investment Y:

PV=$8,700/(1+5%)^1+$8,700/(1+5%)^2+$8,700/(1+5%)^3+$8,700/(1+5%)^4+$8,700/(1+5%)^5=$37,666.45