onsider the following four alternatives: i. £132 received in two years ii. £160 received in five years iii. £200 received in eight years iv. £220 received in ten years What would be the ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year?

onsider the following four alternatives: i. £132 received in two years ii. £160 received in five years iii. £200 received in eight years iv. £220 received in ten years What would be the ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 5PROB

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

4. Consider the following four alternatives:

i. £132 received in two years

ii. £160 received in five years

iii. £200 received in eight years

iv. £220 received in ten years

What would be the ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year?

a		iii, iv, ii, i
b		i, ii, iii, iv
c		iv, iii, ii, i
d		iii, i, ii, iv

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