Question

You are considering two investments. The first pays $40,000 at the end of the seventh years. The second investment pays $20,000 at the end of the sixth years and another $20,000 at the end of the eighth year. The appropriate effective annual interest rate is 4% for both investments. Which investment is worth more today?

Answer 1

ANSWER = Second Investment is Worth more today

a) Investment First that pays $40,000 at the end of the seventh year

Present Value of investment at the end of seventh year = $ 40,000 * PVF (4%, 7th year)

= $ 40,000 * 0.759918

= $ 30,396.71

b) Second investment pays $20,000 at the end of the sixth years and another $20,000 at the end of the eighth year

Present Value of Second investment = $20,000 * PVF(4%, 6th year) + $ 20000 * PVF (4%,8th year)

= $30,420.09

Second Investment is Worth more today