Question

Present Value and Multiple Cash Flows[LO1] 

Investment X offers to pay you $4,200 per year for eight years, whereas Investment Y offers to pay you $6,100 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is 15 percent?

Answer 1

- fax D11 AB =SUM(D3:010) E F C D G H 1 X 2 year Cash flows pv@5% Present value 3 1 $ 4,200 0.9524 $ 4,000 4 2 $ 4,200 0.9070 $ 3,810 5 3 $ 4,200 0.8638 $ 3,628 4 $ 4,200 0.8227 $ 3,455 7 5 $ 4,200 0.7835 $ 3,291 8 6 $ 4,200 0.7462 $ 3,134 9 7 $ 4,200 0.7107 $ 2,985 10 8 $ 4,200 0.6768 $ 2,843 11 NPV $ 27,145 12 13 Y 14 year Cash flows pv@5% Present value 15 1 $ 6,100 0.9524 $ 5,810 16 2 $ 6,100 0.9070 $ 5,533 17 3 $ 6,100 0.8638 $ 5,269 4 $ 6,100 0.8227 $ 5,018 5 $ 6,100 0.7835 $ 4,780 NPV $ 26,410 year Cash flows pv@15% Present value 1 $ 4,200 0.8696$ 3,652 2 $ 4,200 0.7561 $ 3,176 3 $ 4,200 0.6575 $ 2,762 4 $ 4,200 0.5718 $ 2,401 5 $ 4,200 0.4972 $ 2,088 6 $ 4,200 0.4323 $ 1,816 7 $ 4,200 0.3759 $ 1,579 8 $ 4,200 0.3269 $ 1,373 NPV $ 18,847 year Cash flows pv@15% Present value 1 $ 6,100 0.8696 $ 5,304 2 $ 6,100 0.7561 $ 4,612 3 $ 6,100 0.6575 $ 4,011 4 $ 6,100 0.5718 $ 3,488 5 $ 6,100 0.4972 $ 3,033 NPV $ 20,448 18 20 Investment X has higher Present Value at discount rate 5% Investment Y has higher Present Value at discount rate 15%

011 e fx =SUM(D3:010) в F H vear А 1 X 2 year 31 42 5 3 64 7 5 86 97 10 8 11 12 13 Y 14 year 15 1 16 2 17 3 Cash flows 4200 4200 4200 4200 4200 4200 4200 4200 pv@5% =1/1.05 =C3/1.05 =C4/1.05 =C5/1.05 =C6/1.05 =C7/1.05 =C8/1.05 =c9/1.05 Present value =B3*C3 =B4*04 =B5*C5 =B6*C6 =B7*C7 =B8*C8 =B9*C9 =B10*C10 =SUM(D3:010) Cash flows 4200 4200 4200 4200 4200 4200 4200 4200 pv@15% 1=1/1.15 =H3/1.15 =H4/1.15 =H5/1.15 =H6/1.15 =H7/1.15 =H8/1.15 =H9/1.15 NPV Present value =G3*H3 =G4*H4 =G5*H5 =G6*H6 =G7*H7 =G8*H8 =G9*H9 =G10*H10 |=SUM(13:110) UN00 NPV year Cash flows 6100 6100 6100 6100 6100 pv@5% =1/1.05 |=C15/1.05 =C16/1.05 =C17/1.05 =C18/1.05 NPV Present value =B15*C15 =B16*C16 =B17*C17 =B18*C18 =B19*C19 =SUM(D15:019) Cash flows 6100 6100 6100 6100 6100 pv@15% 1=1/1.15 =H15/1.15 =H16/1.15 =H17/1.15 =H18/1.15 NPV Present value =G15*H15 =G16*H16 =G17*H17 =G18*H18 =G19*H19 =SUM(115:119) Investment X has highe Investment Y has highe