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Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment. |
| Investment X | Investment Y | |||
| Year 1 | $ | 4,000 | $ | 7,000 |
| Year 2 | 5,000 | 6,000 | ||
| Year 3 | 6,000 | 5,000 | ||
| Year 4 | 7,000 | 4,000 | ||
| Total | $ | 22,000 | $ | 22,000 |
| Click here to view Exhibit 11B-1, to determine the appropriate discount factor(s) using tables. |
| Required: |
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Compute the present value of the cash inflows for each investment using a 12% discount rate. (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.) |
| Present Value of Cash Flows |
|
| Investment X | $ |
| Investment Y | $ |
| Investment X | |||
| Particulars | Amount | Discounting Factor@12% | Present Value of Cashflow |
| Year 1 | 4000.00 | 0.893 | 3571.43 |
| Year 2 | 5000.00 | 0.797 | 3985.00 |
| Year 3 | 6000.00 | 0.712 | 4272.00 |
| Year 4 | 7000.00 | 0.635 | 4445.00 |
| Total | 22000.00 | 16273.43 |
| Investment Y | |||
| Particulars | Amount | Discounting Factor@12% | Present Value of Cashflow |
| Year 1 | 7000.00 | 0.893 | 6250.00 |
| Year 2 | 6000.00 | 0.797 | 4782.00 |
| Year 3 | 5000.00 | 0.712 | 3560.00 |
| Year 4 | 4000.00 | 0.635 | 2540.00 |
| Total | 22000.00 | 17132.00 |
| Particulars | PV of Cash Flow |
| Investment X | 16,273.43 |
| Investment Y | 17,132.00 |
It is advisable to invest in Investment Y.
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