Question

Investment X offers to pay you $6,000 per year for nine years, whereas Investment Y offers to pay you $8,000 per year for six years. If the discount rate is 5 percent, Investment X has a present value of ? and Investment Y has a present value of ?. If the discount rate is 15 percent, Investment X has a present value of ? and Investment Y has a present value of ?

Answer 1

Assume a $4,000 investment and the following cash flows for two alternatives.
Year InvestmentX Investment Y
1 $1,000 $1,300
2 800 2,800
3 700 100
4 1,900
5 2,000

a. Under the payback method, which investment should be chosen? (Show your work/analysis/calculations for each investment).

b. Why do other methods allow for a better analysis?

Answer 2

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