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# Analyzing the two investment proposals

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Your client is considering the purchase of \$100,000 in common stock, which pays no dividends and will appreciate in market value by 10 percent per year. At the same time, the client is considering an opportunity to invest \$100,000 in a lease obligation that will provide the annual year-end cash flows listed in the table below. Assume that each investment will be sold at the end of four years and that you are given no additional information. Calculate the present value of each of the two investments assuming a 10 percent discount rate and state which one will provide the higher return over the four year period. Use the table and show calculations.

End of Year
1 \$0.00
2 Lease receipts 15,000
3 Lease receipts 25,000
4 Sale proceeds 100,000

Present Value of \$1

Period 6% 8% 10% 12%
1 0.943 0.926 0.909 0.893
2 0.890 0.857 0.826 0.797
3 0.840 0.794 0.751 0.712
4 0.792 0.735 0.683 0.636
5 0.747 0.681 0.621 0.567

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#### Solution Preview

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Solution:

Present Value of Lease option =0*PVF(i=10,n=1)+15000*PVF(i=10,n=2)+25000*PVF(i=10,n=3)+100000*PVF(i=10, n=4)
=0*0.909+15000*0.826+25000*0.751+100000*0.683
=\$99465

We can also use formulas to find present value as under.

We know that Present Value of a cash flow is given by=Future Value of cash flow/(1+discount rate)^no. of period
Present Value of Lease ...

#### Solution Summary

Solution analyzes two investment proposals and chooses the better one.

\$2.19
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## Should investment be made in the given project?

A project costs \$19,000 and promises the following cash flows:

Year 1 \$12,500
Year 2 \$ 6,000
Year 3 \$ 3,000

The appropriate discount rate is 15% per year. Should you invest in this project?
Solve the problem and write a 50-100 word response explaining the results you obtained for the selected question.

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