Investment X offers to pay you $4,800 per year for 9 years, whereas Investment Y offers to pay...

Answer a

PRESENT VALUE OF INVESTMENT X:

• Investment X has a constant cash inflow (that is annuity) of $ 4,800 per year for 9 years.

The present value of an annuity is given by the following formula:

{eq}PVAn = A * PVIFAr,n {/eq}

Where PVAn is the present value of an annuity for n years

A is the amount of annuity, given as $4,800

PVIFAr,n is the present value interest factor for an annuiy of $1 at rate of interestr and number of yearsn.

• Using the above formula, we get

Present value = 4,800 * PVIFA 6%,9years

= 4,800 * 6.802

= $32,650

PRESENT VALUE OF INVESTMENT Y:

• Using the same formula. present value of investment Y can be calculated as follows:

Present value = 7,100 * PVIFA 6%,5years

= 7,100 * 4.212

= 29,905

Answer b

PRESENT VALUE OF INVESTMENT X:

• Here, the discount rate will be 16%. All other data would be same as the previous question.
• Present value = 4,800 * PVIFA 16%,9years

= 4,800 * 4.607

= $22,114

PRESENT VALUE OF INVESTMENT Y:

• Present value = 7,100 * PVIFA 16%,5years

= 7,100 * 3.274

= $23,245