You are comparing two investment options. The cost to invest in either option is

Question

You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Option A is preferable because it is an annuity due. Both options are of equal value given that they both provide $20,000 of income. Option A is the better choice of the two given any positive rate of return. Option B has a lower future value at year 5 than option A given a zero rate of return. Option B has a higher present value than option A given a positive rate of return.

Explanation / Answer

Answer is : Option A is the better choice of the two given any positive rate of return

Because Present value of Cash Inflow is higher in option A than Option B as the higher income earned by option A in earlier year in compare to Option B which generate higher PV in compare to option B

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