BUSI 2083-Consider each of the following situations independently

Subject: Business    / Accounting
Question

Consider each of the following situations independently.

Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment. Compute the present value of the cash inflows for each investment using a 20% discount rate.

Year

Investment X

Investment Y

1

$1,000

$4,000

2

2,000

3,000

3

3,000

2,000

4

4,000

1,000

Total

$10,000

$10,000

At the end of three years, when you graduate from college, your father has promised to give you a used car that will cost $12,000. What lump sum must he invest now to have the $12,000 at the end of three years if he can invest money at:

6%?

10%?

Mark has just won the grand prize on the Hoot ‘n’ Holler quiz show. He has a choice between (a) receiving $500,000 immediately and (b) receiving $60,000 per year for eight years plus a lump sum of $200,000 at the end of the eight-year period. If Mark can get a return of 10% on his investments, which option would you recommend that he accept? (Use present value analysis and show all computations.)

You have just learned that you are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you three options as to how you may receive your inheritance:

You may receive $50,000 immediately.

You may receive $75,000 at the end of six years.

You may receive $12,000 at the end of each year for six years (a total of $72,000).

If you can invest money at a 12% return, which option would you prefer?