Business, 04.11.2020 18:00 elviaortiz402373

You are offered $900 five years from now or $150 at the end of each year for the next five years. If you can earn 6 percent on your funds, which offer will you accept? If you can earn 14 percent on your funds, which offer will you accept? Why are your answers different?

Answers: 2

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Answers

When interest rate is 6%, i would choose to collect $900 in five years because the present value of this option is greater than the present value of the second option

When interest rate is 14%, I would choose to collect $150 per year for 5 years because the present value of this option is greater than the present value of the first option

Explanation:

To determine which option ii would accept, the present value of the cash flows have to be determined

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 to 4 = 0

Cash flow in year 5 = $900

Present value when interest rate is 6% = 672.53

Present value when interest rate is 14% = 467.43

Cash flow each year from year 1 to 5 = $150

Present value when interest rate is 6% = $631.85

Present value when interest rate is 14% = 514.96

When interest rate is 6%, i would choose to collect $900 in five years because the present value of this option is greater than the present value of the second option

When interest rate is 14%, I would choose to collect $150 per year for 5 years because the present value of this option is greater than the present value of the first option

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

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Answer from: Quest

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You are offered $900 five years from now or $150 at the end of each year for the next five years. If...

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