Question

You are considering two investments (ORD and DUE) that each pay $5000 each year for the next 10 years. Investment ORD starts making annual payments 12 months from today, and Investment DUE starts making payments 6 months from today. Which of the following statements is correct?

A) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.
B) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
C) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
D) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.

Answer 1

The correct statement is B) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.

Step-by-step explanation:

When comparing the present value and future value of two investments, it is important to consider the timing of the cash flows and the interest rate. In this case, Investment DUE starts making payments 6 months from today, while Investment ORD starts making payments 12 months from today. The present value of DUE is higher than the present value of ORD because the payments start sooner and are worth more today. However, the future value of ORD may be higher than the future value of DUE depending on the interest rate.

To calculate the present value, we need to discount the future cash flows to their present value. The present value of DUE is higher because the earlier payments are worth more today. However, the future value of ORD may be higher because it has more time to accumulate interest over the 10-year period.

Overall, the correct statement is B) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.