Reference no: EM132651391
Question 1. Which of the following investments would have the highest future value at the end of 10 years? Which has the highest present value today? Rank the choices below from highest to lowest present value. Assume that the effective annual interest rate for all investments is the same and is greater than zero.
a. Investment A pays $250,000 at the beginning of every year for the next 10 years (a total of 10 payments).
b. Investment B pays $125,000 at the end of every 6-month period for the next 10 years (a total of 20 payments).
c. Investment C pays $125,000 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
d. Investment D pays $2.5 million at the end of 10 years (just one payment).
e. Investment E pays $250,000 at the end of every year for the next 10 years (a total of 10 payments).
Question 2. Given the uneven streams of cash flows shown in the following table, answer parts A and B:
Cash Flow Stream
End of Year A B
1 $50,000 $10,000
2 40,000 20,000
3 30,000 30,000
4 20,000 40,000
5 10,000 50,000
Total $150,000 $150,000
A. Find the present value of each series of cash flows, using a 12% discount rate.
B. Discuss how, and why, the two different present values are different given that the sum total of each series of cash flow is the same.
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