Which of the following would be most attractive to an investor, all other things being equal?
A) A cash flow of $60,000 today
B) A cash flow of $60,000 in 6 years
c)a cash flow of $10,000 each year for the next 3 years
d) A cash flow of $30,000 year one and $30,000 in year 6.
The ans is b. Can someone explain? Thx!

The answer is NOT B.

The concept of Time Value of Money and Rate of Return would play in.

Let's say you can earn 10% on your money each year.



Option A
A) A cash flow of $60,000 today
60,000 today, plus 10% a year will give you about 106,000 in 6 years.

Option B
B) A cash flow of $60,000 in 6 years
60,000 in 6 years gives you 60,000 in 6 years.

Option C
c)a cash flow of $10,000 each year for the next 3 years
That gives you about 46,000 in 6 years

Option D
d) A cash flow of $30,000 year one and $30,000 in year 6.
That gives you about 113,000 in 6 years.

My numbers are just quick rough estimates…so either option a or d would be the answer.

Quote:

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Originally Posted by zhao2vic

Which of the following would be most attractive to an investor, all other things being equal?
A) A cash flow of $60,000 today
B) A cash flow of $60,000 in 6 years
c)a cash flow of $10,000 each year for the next 3 years
d) A cash flow of $30,000 year one and $30,000 in year 6.
The ans is b. Can someone explain? Thx!

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Hi, CaptainForest!
Thx for your reply. I understand all except for your ans for option C & D.
Well, I converted all the options to the present value (PV), according to the time value of money concept and I got
A- 60,000
B- 33,870
C- 24,869
whereas I do not know how to calculate the PV for option D.
Do u mind telling me how?
Thx again!

You are working back to the PV? That method works too.

The PV would be 30,000 for the initial part and as for the 30,000 in years 6…

I don't have a calculator on me, but since in option B, you said the PV of a cash flow of 60,000 in year 6 would be 33,870 now….

Then 30,000 in year 6 would be a PV of 33,870 / 2 = 16,935

+ initial 30,000 today in year 1

Total of 46,935