Problem 6-2 Present Value and Multiple Cash Flows [LO 1] Investment X offers to
ID: 2761881 • Letter: P
Question
Problem 6-2 Present Value and Multiple Cash Flows [LO 1]
Investment X offers to pay you $5,100 per year for 9 years, whereas Investment Y offers to pay you $7,500 per year for 5 years.
If the discount rate is 6 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
If the discount rate is 16 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Investment X offers to pay you $5,100 per year for 9 years, whereas Investment Y offers to pay you $7,500 per year for 5 years.
Explanation / Answer
1. Computation of Present value
Year X Discount@6% PV cash flows Y PV cash flows
1 5100 0.943 4809.3 7500 7072.5
2 5100 0.889 4533.9 7500 6667.5
3 5100 0.839 4278.9 7500 6292.5
4 5100 0.792 4039.2 7500 5940
5 5100 0.747 3809.7 7500 5602.5
6 5100 0.704 3590.4
7 5100 0.665 3391.5
8 5100 0.627 3197.7
9 5100 0.591 3014.1
Present value of cash flows 34664.7 31575
Present value of X is 34664.7
Present value of Y is 31575
Year X discount@16% PVCF Y PVCF
1 5100 0.862 4396.2 7500 6465
2 5100 0.743 3789.3 7500 5572.5
3 5100 0.641 3269.1 7500 4807.5
4 5100 0.552 2815.2 7500 4140
5 5100 0.476 2427.6 7500 3570
6 5100 0.410 2091
7 5100 0.354 1805.4
8 5100 0.305 1555.5
9 5100 0.263 1341.3
PV cash flows 23490.6 24555
PV of X is 23490.6
PV of Y is 24555.