The paper "Investment and Interest Rate" is a perfect example of a finance and accounting assignment. Investment appraisal is effectively achieved using the net present value and internal rates of return approaches. However, the application of the two approaches is limited to certain factors and the type of investment. For instance, the net present value approach is appropriate in evaluating the present value of a possible investment. The internal rate of return gives the rate at which the internal cash flows in an investment. In long term investments, the IRR is most appropriate (Geddes 2002).
In this case, the investments are evaluated after three and ten years with a fixed discount rate of 5%. The first investment has a $1500 returns in 3years, it follows that the investment has a $5000 return after ten years. On the other hand, the second investment has an overall ten year returns amounting to $3000. Given the fact that the discount rates are constant, the first investment is more viable as opposed to the second investment. Question 1(b) You have the choice of two income streams. The first involves receiving $2,000 immediately.
The second involves receiving $1,000 in one year and $1,500 in two years. Assuming a discount rate of 8% p. a., which income stream do you choose? Solution Using the rate of return, the two streams are compared over the two years. The first stream yields $320 in two years and is valued at $2320 at the end of the second year. In the second stream, the amount that is subject to calculation of interest is $1000 because the second part $1,500 is paid after two years and does not attract interest.
The total value of the second stream is $1160+$1500 after two years. The value is $2660. Comparing the two figures, the initial amount invested is different, however, in the first stream, the amount invested is less compared to the second investment. The yields over the two years indicate that the first stream is more profitable and more viable. Question 1(c) You have the choice of two income streams. The first involves receiving $3,000 in three years and the second involves receiving $3,500 in four years. At what discount rate are you indifferent between these two income streams? Solution The total accrued at the end of the two seasons of the investments determines the difference in interest rate.
At the point where the present values of the investments are equal is essential in evaluating the performance of the two investments.
ReferencesGeddes, R. (2002).Valuation and investment appraisal. Kent: Financial World Pub.