Answer:
When interest rate is 6%, i would choose to collect $900 in five years because the present value of this option is greater than the present value of the second option
When interest rate is 14%, I would choose to collect $150 per year for 5 years because the present value of this option is greater than the present value of the first option
Explanation:
To determine which option ii would accept, the present value of the cash flows have to be determined
Present value is the sum of discounted cash flows
Present value can be calculated using a financial calculator
Cash flow in year 1 to 4 = 0
Cash flow in year 5 = $900
Present value when interest rate is 6% = 672.53
Present value when interest rate is 14% = 467.43
Cash flow each year from year 1 to 5 = $150
Present value when interest rate is 6% = $631.85
Present value when interest rate is 14% = 514.96
When interest rate is 6%, i would choose to collect $900 in five years because the present value of this option is greater than the present value of the second option
When interest rate is 14%, I would choose to collect $150 per year for 5 years because the present value of this option is greater than the present value of the first option
To find the PV using a financial calculator:
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
