Question

A company must make a choice between two investment alternatives. Alternative 1 will return the company ​$20,000 at the end of three years and ​$70,000 at the end of six years. Alternative 2 will return the company ​$10,000 at the end of each of the next six years. The company normally expects to earn a rate of return of 15​% on funds invested. Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

The present value of Alternative 1 and 2 is?

Answer 1

Present value of an alternative 1:
=[$20000/(1+0.15)^3]+[$70000/(1+0.15)^6]
=$13150.32+30262.93
=$43413.26
Present value of alternative 2
PV= FV/(1+r)^n
Where,
FV= Future Value
PV = Present Value
r = Interest rate
n= periods in number
= $10000/( 1+0.15)^6
=10000/2.31306
= $4323.28
Preferred alternative = Alternative 1