nvestment X offers to pay you 4200 per year for seven years

nvestment X offers to pay you $4,200 per year for seven years, whereas Investment Y offers to pay you $6,300 per year for four years. (Use a Financial calculator to arrive at the answers. Round \"PV Factor\" to 3 decimal places. Round the final answers to 2 decimal places.)

Calculate the present value for Investment X and Y if the discount rate is 6 percent.

X

Y

Calculate the present value for Investment X and Y if the discount rate is 16 percent.

X

Y

Solution

a) Calculation of present value for Investment X and Y if the discount rate is 6 percent.

We have

Present value of Annuity = A*[(1-(1+r)^-n)/r]

Where

A - Annuity payment

r - rate per period

n - no. of periods

Present value for Investment X = 4200*[(1-1.06^-7)/.06]

= 4200 * 5.582

= $23,444.40

Present value for Investment Y = 6300*[(1-1.06^-4)/.06]

= 6300 * 3.465

= $21,829.50

b) Calculation of present value for Investment X and Y if the discount rate is 16 percent.

Present value for Investment X = 4200*[(1-1.16^-7)/.16]

= 4200 * 4.039

= $16,963.80

Present value for Investment Y = 6300*[(1-1.16^-4)/.16]

= 6300 * 2.798

= $17,627.40

note: 1-(1+r)^-n)/r is called PV Factor