Question

annual cash flows

Annual cash flows from two competing investment opportunities are given. Each investment opportunity will require the same initial investment (Click the icon to view the competing investment opportunities) (Click the icon to view the Present Value of $1 table) Click the icon to view the Present Value of Annuity of S1 table.) Requirement 1. Assuming a 14% interest rate, which investment opportunity would you choose? Begin by computing the present value of each investment opportunity (Assume that the annual cash flows occur at the end of each year. If using present value tables, use factor amounts rounded to three decimal places. XXX. Round intermediary computations and your final answer to the nearest whole dollar) The present value of investment opportunity Ais and the present value of investment opportunity B is 5 Investment opportunity should be chosen because the present value of cash flows is than the present value of investment opportunity Enter any number in the edities and then continue to the next question

Answer 1

Typically, in order to determine the best investment amongst the competing investment, we will need to compute the present value of each investment. The investment with higher present value shall be chosen over the other investment.

In this case, the discounting factor is 14%. Given that the cash flow occur at the end of each year, we will have to use the cash flow with appropriate discount factor at the end of each year. We will have to use the "present value of $1 table" to arrive at the present value of cash flows of investment A and B. Take the present value factor @14% from the table.

The detailed working is summarised in the below table:

					in $
Year	Investment		Discounting Factor @14%	Present value
	A	B		Investment A	Investment B
a	b	c	d	e=b*d	f=c*d
1	6,000	6,000	0.877	5,262	5,262
2	5,000	6,000	0.769	3,845	4,614
3	7,000	6,000	0.679	4,753	4,074
Total	18,000	18,000		13,860	13,950

Answer

The present value of investment opportunity A is $ 13,860 and B is $13,950.

Investment opportunity B should be chosen because the present value of cash flows in investment B is higher than the present value of investment opportunity in A