Investments and Investment B each cost the same amount to invest in. The cash-fl

Question

Investments and Investment B each cost the same amount to invest in. The cash-flows for each of these investments are shown below. Which of the following scenarios is correct? (Try working with some example preference rates!) A is preferable to B when the interest rate is below 11.11%. B is preferable to A when the interest rate is below 11.11%. A is preferable to B when the interest rate is between 11.11% and 25.00%. B is preferable to A when the interest rate is between 11.11% and 25.00%. A is preferable to B when the interest rate is above 25.00%. B is preferable to A when the interest rate is above 25.00%. I, IV and V II, III and VI I, III and V II, IV and VI Not enough info.

Explanation / Answer

Solution.

E. Not enough Info

Year A Cash flow PV Factore @11.11% PV 0 -5 1.0000               (5.0000) 1 3.72 0.9000                  3.3480 2 0 0.8100                           -   3 4 0.7290                  2.9160 PV                  1.2640 Year A Cash flow PV Factore @11.11% PV 0 -5 1.0000               (5.0000) 1 3 0.9000                  2.7000 2 1.7 0.8100                  1.3770 3 3 0.7290                  2.1870 PV                  1.2640 Year A Cash flow PV Factore @25% PV 0 -5 1.0000               (5.0000) 1 3.72 0.8000                  2.9760 2 0 0.6400                           -   3 4 0.5120                  2.0480 PV                  0.0240 Year A Cash flow PV Factore @25% PV 0 -5 1.0000               (5.0000) 1 3 0.8000                  2.4000 2 1.7 0.6400                  1.0880 3 3 0.5120                  1.5360 PV                  0.0240

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