You are comparing two Investment options that each pay 5 percent interest, compo

Question

You are comparing two Investment options that each pay 5 percent interest, compounded annum Both options will provide you with $12,000 of Income. Option A pays three annual payments staffing with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two Investment options? Option A has the higher future value at the end of year three. Option Ale an annuity. Option B is a perpetuity. Option B has a higher present value at time zero than does option A Both options are of equal value given that they both provide $12,000 of income.

Explanation / Answer

- Compounding of cash flows of Option A and Option B @5% will show that Option B has higher Future value than that of Option A. Thus, cannot be first option.

- Nothing is mentioned about when the amount will get receive thus, cannot comment whether A is annuity or not. Also, since amount is only for 3 years thus, B is also not perpetuity.

- When we'll discount the cash flows of A and B @5% we'll find that the present value of B will be more than A. Thus, the correct one is Option D, B has a higher present value at time zero than A.

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