Question

Investment X yields a payment of $4500 at the end of year 1, a payment of $5500 at the end of year 2, a payment of $6500 at the end of year 3, and a payment of $8000 at the end of year 4. Investment Y yields a payment of $6500 at the end of year 1, a payment of $5500 at the end of year 2, a payment of $4500 at the end of year 3, and a payment of $3500 at the end of year 4. What is the present value of Investment Y if the interest rate is 5%?

Answer 1

Solution: Year Cash flow PV factor at 5% PV factor working 1 2 6500 5500 45001 3500 0.95238 1/(1+0.05)^1 0.90703 1/(1+0.05)^2 0.86384 1/(1+0.05)^3 0.822701/(1+0.05)^4 PV of Investment Y PV c=a*b 6190.48 4988.66 3887.27 2879.46 17945.87 4