Question

Let r be the nominal interest rate, compounded yearly. For what values of r is the cash flow stream 20,10 preferable to the cash flow stream 0, 34? ( Do not use Financial calculator or excel, show step)

Answer 1

ANSWER

Particulars	Case 1	Case 2
Present Value	20	10
Future value	34	34
Formula to compute interest	Future value =Present value (1+r)^t	Future value =Present value (1+r)^t
r equals to	(Future value/Present value)^1/t-1	(Future value/Present value)^1/t-1
required rate of return if t = 1 year	70%	240%
required rate of return if t = 2 year	30.38%	84%

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