Question

P4A.16 (similar to) Question Help Using a financial calculator or an Excel spreadsheet, calculate the following a. The present value of $740 to be received 2 years from now, using a discount rate of 14%. b. The present value of the following end-of-year income streams, using a discount rate of 21% and assuming it is now the beginning of 2018 a. The present value of the future sum in part (a) is $ (Round to the nearest cent.)

Answer 1

Solution- P4A 16

(a)

We know that as per CAGR formula, the following is the equation:

Future value= Present value*(1+r)ⁿ

740= PV*(1+14%)²

PV= $569.41

(b)

Present value (Stream A)= 80*(1/1.21) + 80*(1/1.21)² + 80*(1/1.21)³ + 80*(1/1.21)⁴ + 80*(1/1.21)⁵ + 80*(1/1.21)⁶ + 80*(1/1.21)⁷

Present value (Stream A)= $280.64

Present value (Stream B)= 140*(1/1.21) + 120*(1/1.21)² + 100*(1/1.21)³ + 80*(1/1.21)⁴ + 60*(1/1.21)⁵ + 40*(1/1.21)⁶ + 20*(1/1.21)⁷

Present value (Stream B)= $332.58

Solution- P4A 18

Present value (Stream A)= -15,435*1 + 2,700*(1/1.15) + 3,836*(1/1.15)² + 5,091*(1/1.15)³ + 5,347*(1/1.15)⁴ + 5,907*(1/1.15)⁵

Present value (Stream A)= -$845.20

Present value (Stream B)= -10,566*1 + 5,090*(1/1.15) + 4,622*(1/1.15)² + 3,996*(1/1.15)³ + 1,300*(1/1.15)⁴ + 826*(1/1.15)⁵

Present value (Stream B)= $1,136.37

Hence, Kent must choose investment B as it has higher present value.