Business, 24.03.2020 01:08 LunaShiner

Finding a present value is the reverse of finding a future value.

is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.

Which of the following investments that pay will $18,500 in 5 years will have a higher price today?

The security that earns an interest rate of 5.50%.

The security that earns an interest rate of 8.25%.

Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 8.20%. Assuming that both investments have equal risk and Eric’s investment time horizon is flexible, which of the following investment options will exhibit the lower price?

An investment that matures in five years

An investment that matures in six years

Which of the following is true about present value calculations?

Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

Answers: 1

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Answer from: brad7330

the investment with the interest rate of 5.5% has the higher price today.

The investment that matures in 6 years has the lower price.

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

Explanation:

Present value is the sum of discounted cash flows.

To determine which investment would have the greater price today, one has to calculate the present value of the investments.

Present value can be calculated using a financial calculator.

For the first investment,

Cash flow from year 1 to 4 = 0

Cash flow in year 5 = $18,500

Interest rate = 5.50%

Present value = $14,154.99

For the second investment,

Cash flow from year 1 to 4 = 0

Cash flow in year 5 = $18,500

Interest rate = 8.50%

Present value = $12,303.34

From the calculation, the investment with the interest rate of 5.5% has the higher present value. So, the investment with the interest rate of 5.5% has the higher price today.

2. To determine which investment option has a lower price today, find the present value of the two options.

The present value of the investment that matures in 5 years is $674.32

The present value of the investment that matures in 6 years is $623.21

The investment that matures in 6 years has the lower price.

From the above calculations, as years increase, the present value and price of an investment falls.

To find the PV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you

Answer from: Quest

answer: most likely c

explanation:

Answer from: Quest

True i took the test already

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Finding a present value is the reverse of finding a future value.

is the process of calc...

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