Question

Investment X offers to pay you $5,900 per year for nine years, whereas Investment Y offers to pay you $8,600 per year for five years. 

a. Calculate the present value for Investments X and Y if the discount rate is 4 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) 

b. Calculate the present value for Investments X and Y if the discount rate is 14 percent (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) 

A well-known financial writer argues that he can earn an extremely high return buying wine by the case. Specifically, he assumes that he will consume one $8 bottle of fine Bordeaux per week for the next 12 weeks. He can either pay $8 per week or buy a case of 12 bottles today. If he buys the case, he receives a discount of 5 percent. Assume he buys the wine and consumes the first bottle today. 

What is the EAR of purchasing wine by the case with this discount? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 

EAR = _______ %

Answer 1

1.

a	Investment X	$ 43,868.27
	Investment Y	$ 38,285.48
b	Investment X	$ 29,183.76
	Investment Y	$ 29,524.66

Working:

Present value of uniform cash flows = Annual cash flow * PVIFA as applicable

(a)

	Particulars	Inv X	Inv Y
1	Annual cash flow	$    5,900.00	$    8,600.00
2	Discount rate	4%	4%
3	Period in years	9	5
4	PVIFA(From tables)	7.4353	4.4518
5=1*4	Present value	$ 43,868.27	$ 38,285.48

(b)

	Particulars	Inv X	Inv Y
1	Annual cash flow	$    5,900.00	$    8,600.00
2	Discount rate	14%	14%
3	Period in years	9	5
4	PVIFA(From tables)	4.9464	3.4331
5=1*4	Present value	$ 29,183.76	$ 29,524.66

(As per the Chegg guidelines, Answered 1 st question ( it has only 2 sub parts) only. Post second question separately since its not a subpart of the main question. )

Answer 2