Purchase Solution

Calculating which investment option has the higher present value

Not what you're looking for?

Ask Custom Question

Investment X offers to pay you $2,000 per year for 10 years, whereas Investment Y offers to pay you $4,000 per year for 4 years. Which of these cash flow streams has the higher present value if the discount rate is 5%? If the discount rate is 15%?

Purchase this Solution
Solution Summary

The solution presents very clear instructions for how to calculate the present value of a future stream of payments. Two methods are mentioned; one is demonstrated. Then the set up for the problems in this posting are done and explained.

Solution Preview

Refer to the attachment for the complete solution.

There are two ways you could go about this problem:

1) you could discount back one period at a time, or
2) you could calculate the present values individually and then add them up.

For purposes of illustration, I'll demonstrate calculating the present values than adding them all up.

Remember - the present value of a cash flow is the future value multiple by 1/1+Discount Rate.

Let's say for example you had investment Z, this investment will give you 3 payments of 5,000 for 3 years. Let's assume the discount rate 15%.

The cash flows would be as ...

Purchase this Solution
Free BrainMass Quizzes
Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

View More Free Quizzes
Related BrainMass Solutions

  • Calculating net investment, net cash flows and net present value

    Which investment would Bob most likely recommend given his recommendation to use the Net Present Value method? Why? Bob would recommend option 2, because it gives a higher net present value.

  • Calculate NPV and Apply Black-Scholes Model

    The project's cost of capital is 13%. a. What is the project's net present value? b.

  • Capital Budgeting

    Option B has a higher present value than option A given any positive rate of return. D. Option B has a lower future value at year 5 than option A given a zero rate of return.

  • Calculating Present Values and Multiple Cash Flows

    Which of these cash flow streams has the higher present value if the discount rate 5 percent? Explain. b. If the discount rate is 22 percent? Your tutorial is in excel, attached using the PV, RATE, NPER, NPV functions.

  • Definition of Factors and Cost Measurement

    Thus, the decision criteria is the investment project which results to higher shareholder wealth. Investment decision criteria often used in evaluating capital budgeting projects are the net present value and the internal rate of return.

  • NPV Investment Opportunity

    Probability Question - NPV Expected NPV Expected net present value is a capital budgeting technique which adjusts for uncertainty by calculating NPVs under different scenarios and probability-weighting them to get the most likely NPV.

  • Financial management: comparing two investment options

    Option B has a higher present value than Option A given a positive rate of return D. Option B has a lower future value at year 5 than Option A given a zero rate of return E.

  • Planning for capital investments

    The solution explains how to decide which capital investment should be accepted

  • Article Critique: Cash Flow

    However, it has evolved into a value based stock with steady, if not spectacular results, more in line with the techniques used in calculating DCF.

View More Related Solutions