Annual cash flows from two competing investment opportunities are given. Each investment opportunity will require the same initial investment at the end of each year.
Requirement
Assuming a
4%
interest rate, determine the investment opportunity that should be chosen.
Question content area bottom
Part 1
Assuming a
4%
interest rate, determine the investment opportunity that should be chosen.
Begin by computing the present value of each investment opportunity. (Round your answers to the nearest whole dollar.)
The present value of investment opportunity A is
$enter your response here.
| Investment | ||
|---|---|---|
| Year | A | B |
| 1. . . . . . . . . . . . . | $10,000 | $7,000 |
| 2. . . . . . . . . . . . . | 7,000 | 7,000 |
| 3. . . . . . . . . . . . . | 4,000 | 7,000 |
| Total | $21,000 | $21,000 |
| Period | 4% | 5% | 6% | 7% | 8% | 10% | 12% | 14% | 16% |
| 1 | 0.962 | 0.952 | 0.943 | 0.935 | 0.926 | 0.909 | 0.893 | 0.877 | 0.862 |
| 2 | 0.925 | 0.907 | 0.89 | 0.873 | 0.857 | 0.826 | 0.797 | 0.769 | 0.743 |
| 3 | 0.889 | 0.864 | 0.84 | 0.816 | 0.794 | 0.751 | 0.712 | 0.675 | 0.641 |
| 4 | 0.855 | 0.823 | 0.792 | 0.763 | 0.735 | 0.683 | 0.636 | 0.592 | 0.552 |
| 5 | 0.822 | 0.784 | 0.747 | 0.713 | 0.681 | 0.621 | 0.567 | 0.519 | 0.476 |
| 6 | 0.79 | 0.746 | 0.705 | 0.666 | 0.63 | 0.564 | 0.507 | 0.456 | 0.41 |
| 7 | 0.76 | 0.711 | 0.665 | 0.623 | 0.583 | 0.513 | 0.452 | 0.4 | 0.354 |
| 8 | 0.731 | 0.677 | 0.627 | 0.582 | 0.54 | 0.467 | 0.404 | 0.351 | 0.305 |
| 9 | 0.703 | 0.645 | 0.592 | 0.544 | 0.5 | 0.424 | 0.361 | 0.308 | 0.263 |
| 10 | 0.676 | 0.614 | 0.558 | 0.508 | 0.463 | 0.386 | 0.322 | 0.27 | 0.227 |
| 11 | 0.65 | 0.585 | 0.527 | 0.475 | 0.429 | 0.35 | 0.287 | 0.237 | 0.195 |
| 12 | 0.625 | 0.557 | 0.497 | 0.444 | 0.397 | 0.319 | 0.257 | 0.208 | 0.168 |
| 13 | 0.601 | 0.53 | 0.469 | 0.415 | 0.368 | 0.29 | 0.229 | 0.182 | 0.145 |
| 14 | 0.577 | 0.505 | 0.442 | 0.388 | 0.34 | 0.263 | 0.205 | 0.16 | 0.125 |
| 15 | 0.555 | 0.481 | 0.417 | 0.362 | 0.315 | 0.239 | 0.183 | 0.14 | 0.108 |
| 16 | 0.534 | 0.458 | 0.394 | 0.339 | 0.292 | 0.218 | 0.163 | 0.123 | 0.093 |
| 17 | 0.513 | 0.436 | 0.371 | 0.317 | 0.27 | 0.198 | 0.146 | 0.108 | 0.08 |
| 18 | 0.494 | 0.416 | 0.35 | 0.296 | 0.25 | 0.18 | 0.13 | 0.095 | 0.069 |
| 19 | 0.475 | 0.396 | 0.331 | 0.277 | 0.232 | 0.164 | 0.116 | 0.083 | 0.06 |
| 20 | 0.456 | 0.377 | 0.312 | 0.258 | 0.215 | 0.149 | 0.104 | 0.073 | 0.051 |
| Present Value of Annuity of $1 | |||||||||
| Period | 4% | 5% | 6% | 7% | 8% | 10% | 12% | 14% | 16% |
| 1 | 0.962 | 0.952 | 0.943 | 0.935 | 0.926 | 0.909 | 0.893 | 0.877 | 0.862 |
| 2 | 1.886 | 1.859 | 1.833 | 1.808 | 1.783 | 1.736 | 1.69 | 1.647 | 1.605 |
| 3 | 2.775 | 2.723 | 2.673 | 2.624 | 2.577 | 2.487 | 2.402 | 2.322 | 2.246 |
| 4 | 3.63 | 3.546 | 3.465 | 3.387 | 3.312 | 3.17 | 3.037 | 2.914 | 2.798 |
| 5 | 4.452 | 4.329 | 4.212 | 4.1 | 3.993 | 3.791 | 3.605 | 3.433 | 3.274 |
| 6 | 5.242 | 5.076 | 4.917 | 4.767 | 4.623 | 4.355 | 4.111 | 3.889 | 3.685 |
| 7 | 6.002 | 5.786 | 5.582 | 5.389 | 5.206 | 4.868 | 4.564 | 4.288 | 4.039 |
| 8 | 6.733 | 6.463 | 6.21 | 5.971 | 5.747 | 5.335 | 4.968 | 4.639 | 4.344 |
| 9 | 7.435 | 7.108 | 6.802 | 6.515 | 6.247 | 5.759 | 5.328 | 4.946 | 4.608 |
| 10 | 8.111 | 7.722 | 7.36 | 7.024 | 6.71 | 6.145 | 5.65 | 5.216 | 4.833 |
| 11 | 8.76 | 8.306 | 7.887 | 7.499 | 7.139 | 6.495 | 5.938 | 5.453 | 5.029 |
| 12 | 9.385 | 8.863 | 8.384 | 7.943 | 7.536 | 6.814 | 6.194 | 5.66 | 5.197 |
| 13 | 9.986 | 9.394 | 8.853 | 8.358 | 7.904 | 7.103 | 6.424 | 5.842 | 5.342 |
| 14 | 10.563 | 9.899 | 9.295 | 8.745 | 8.244 | 7.367 | 6.628 | 6.002 | 5.468 |
| 15 | 11.118 | 10.38 | 9.712 | 9.108 | 8.559 | 7.606 | 6.811 | 6.142 | 5.575 |
| 16 | 11.652 | 10.838 | 10.106 | 9.447 | 8.851 | 7.824 | 6.974 | 6.265 | 5.669 |
| 17 | 12.166 | 11.274 | 10.477 | 9.763 | 9.122 | 8.022 | 7.12 | 6.373 | 5.749 |
| 18 | 12.659 | 11.69 | 10.828 | 10.059 | 9.372 | 8.201 | 7.25 | 6.467 | 5.818 |
| 19 | 13.134 | 12.085 | 11.158 | 10.336 | 9.604 | 8.365 | 7.366 | 6.55 | 5.877 |
| 20 | 13.59 | 12.462 | 11.47 | 10.594 | 9.818 | 8.514 | 7.469 | 6.623 | 5.929 |
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