Answer:
Instructions are below.
Explanation:
Giving the following information:
Investment X offers to pay you $4,700 per year for 9 years
Investment Y offers to pay you $6,400 per year for 5 years.
<u>Requirement 1:</u>
First, we need to calculate the final value, using the following formula:
FV= {A*[(1+i)^n-1]}/i
A= annual cash flow
Investment X:
FV= {4,700*[(1.08^9)-1]} / 0.08
FV= $58,691.52
Investment Y:
FV= {6,400*[(1.08^5)-1]} / 0.08
FV= $37,546.25
<u>Now, the present value:</u>
PV= FV/(1+i)^n
Investment X:
PV= 58,691.52/(1.08^9)
PV= $29,360.37
Investment Y:
PV= 37,546.25/(1.08^5)
PV= $25,553.35
Investment X provides the higher present value, therefore, it should be the one to choose.
<u>Requirement 2:</u>
First, we need to calculate the final value, using the following formula:
FV= {A*[(1+i)^n-1]}/i
A= annual cash flow
Investment X:
FV= {4,700*[(1.20^9)-1]} / 0.20
FV= $97,754.84
Investment Y:
FV= {6,400*[(1.20^5)-1]} / 0.20
FV= $47,626.24
<u>Now, the present value:</u>
PV= FV/(1+i)^n
Investment X:
PV= 97,754.84/(1.20^9)
PV= $18,945.54
Investment Y:
PV= 47,626.24/(1.20^5)
PV= $19,139.92
Investment Y provides the higher present value, therefore, it should be the one to choose.
