Calculate the present value of each investment

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Reference no: EM13214836

Your client is considering the purchase of $100,000 in common stock, which pays no dividends and will appreciate in market value by 10 percent per year. At the same time, the client is considering an opportunity to invest $100,000 in a lease obligation that will provide the annual year-end cash flows listed. Assume that each investment will be sold at the end of three years and that you are given no additional information.
Calculate the present value of each of the two investments assuming a 10 percent discount rate, and state which one will provide the higher return over the three year period. Use the data, and show your calculations.

Exhibit 14.23
End of Year
1 $0
2 lease receipts $15,000
3 lease receipts $25,000
4 Sales proceeds $100,000

Present value of $1
Period 6% 8% 10% 12%
1 0.943 0.926 0.909 0.893
2 0.890 0.857 0.826 0.797
3 0.840 0.794 0.751 0.712
4 0.792 0.735 0.683 0.636
5 0.747 0.681 0.621 0.567

Reference no: EM13214836

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