Consider the stream of unequal cash flows from two investments in the table below. The initial outlay for both investments is $100,000.
Year Investment A Cash Flow Investment B Cash Flow
0 $(100,000) $(100,000)
1 $20,000 $10,000
2 $(10,000) $50,000
3 $50,000 $40,000
4 $40,000 $(20,000)
5 $30,000 $40,000
(a) Calculate the present value (PV) of each investment with a 5% discount rate.
(b) Assuming a 5% discount rate, which investment would you prefer? Explain your answer.
(c) In each investment, how long would it take to recover the initial outlay?