Alternative Investment Decision

H

hsmath

New member
Joined
Jul 9, 2010
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9
Hi all,
I am new to Finance.
Any pointers on how to solve this ? What is to be calculated here ? What formula to use.


Two alternative investments are being considered:
Year ___A___ _____B____
0 -$500 -$700
1 – 5 +$150 ?

A and B have negative value for Year 0
What is the annual benefit A that willmake B a better investment than A?
 
Not real clear what is wanted.

Try this:

v = 1/(1+i)

Then

-500 - 5v = -700 + 150v

Solve for v and ponder the meaning of it.
 
Year
0 1 2 3 4 5
-----+---------------------+-----------------+----------------+----------------+----------------+--------------------

A -500 150 150 150 150 150

B -700 ? ? ? ? ?


Need the annual benefit for investment of $700 so that it is better than investing $500 which gives 150/year

You mentioned use v = 1/(1+ i) but i is not given here ?
 
Like I said, it's not real clear what is wanted.
 
AGAIN, a weirdly worded problem by some half-drunk teacher!

To break EVEN (x = annual benefit from 700):
500/150 = 700/x
x = 210

So to make it BETTER: 210.000000000000.....0000000001
Gey my drift? :shock:
 
The interest rate is not given for this prob.
What I was thinking was get the interest rate at which you get an annuity flow of 150 for 5 years when investing $500 at year zero

Then use the same interest rate to get yearly annuity for investing $700 at year zero.

So for the same interest rate but different investment ... I get the value which would tell me if I am good for the $700 investment.

Does this approach look ok.

so how to find the interest rate then ? What formula
 
DON'T make it more difficult than it is: read my answer AGAIN...it's that simple.
 
Ok Boss I got It.

You are correct . Keep it simple. ( this is also for those teachers who ask those questions )
 
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