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    zhao2vic's Avatar
    zhao2vic Posts: 16, Reputation: 1
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    #1

    Mar 29, 2008, 07:18 AM
    Long-term financing
    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!
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #2

    Mar 29, 2008, 04:11 PM
    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.
    zhao2vic's Avatar
    zhao2vic Posts: 16, Reputation: 1
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    #3

    Mar 30, 2008, 01:34 AM
    Quote 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!
    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!
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #4

    Mar 30, 2008, 06:12 PM
    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
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