Question

Problem 5-50 (similar to) ​(Present value of an uneven stream of payments​) You are given three investment alternatives to analyze. The cash flows from these three investments are shown in the Below table . Assuming a discount rate of 25 ​percent, find the present value of each investment.

a. What is the present value of investment A at 25 percent annual discount​ rate?  

	INVESTMENT
END OF YEAR	A	B	C
1	$12,000		$12,000
2	12000
3	12000
4	12000
5	12000	$12,000
6		12000	60000
7		12000
8		12000
9		12000
10		12000	12000

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

a.For A:

Present value=12000/1.25+12000/1.25^2+12000/1.25^3+12000/1.25^4+12000/1.25^5

=12000/[1/1.25+1/1.25^2+...........+1/1.25^5]

=$12000*2.68928

=$32271.36

b.B:

Present value=12000/1.25^5+12000/1.25^6+.......+12000/1.25^10

=12000[1/1.25^5+1/1.25^6+...........+1/1.25^10]

=$12000*1.20890327

which is equal to

=$14506.84(Approx)

c.

C:

Present value=12000/1.25+60,000/1.25^6+12000/1.25^10

which is equal to

=$26617.13(Approx).