Question

QUESTION Ап investment will pay you $120 in one year and $200 in two years. If the intere st rate is 4%, what is the present value of these cash flows? $300.29 $304.91 O $307.69 。5320.00 None of the above QUESTION 2 Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate Year Investment X Investment Y 1 $5,000 $11,000 2 $7,000 $9,000 3 $9,000 $7,000 4 $11,000 $5,000 applies to both investments? Investment X has a higher present value. Investment Y has a higher present value. Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both

Answer 1

1)	$ 300.29
Working:
	Year	Cash flows	Discount factor	Present value
	a	b	c=1.04^-a	d=b*c
	1	$        120	0.961538	$ 115.38
	2	$        200	0.924556	$ 184.91
	Total			$ 300.30
2)	Investment Y has a higher present value.
Working:
	Present value of cash flows and years has inverse relation.
	It means if cash flows are in the year 1 and same cash flows are in year 5 then present value of cash flows of year 1 will be higher than present value of cash flows in year 5.
	So, investment Y has higher present value of cash flows as $ 11,000 and $ 9,000 are in year 1 and year 2 than investment X which has same cash flows are in year 3 and 4.