Question

Suppose you are evaluating two investments, both of which require to pay k 5,500 today. investment a will pay you k 7,020 in five years, whereas investment b will pay k 8,126 in eight years. based only on the return you would earn from investment, which one is better?.

Answer 1

When comparing two investments using a 15% interest rate, Investment A has a higher present value than Investment B, making it the better option based on return alone.

Step-by-step explanation:

When evaluating two investments to determine which one is better based solely on the return, a financial investor will consider the future payments' present value using a chosen interest rate. The appropriate interest rate in this scenario is 15%. You can calculate the present value (PV) using the formula:

PV = Future Value / (1 + interest rate)^number of periods

For Investment A:

PV = 7,020 / (1 + 0.15)^5

PV = \( 7,020 / (1.15)^5 \)

PV = 7,020 / 2.011357

PV = \( \approx 3,489.95 \)

For Investment B:

PV = 8,126 / (1 + 0.15)^8

PV = \( 8,126 / (1.15)^8 \)

PV = 8,126 / 3.059021

PV = \( \approx 2,656.37 \)

Since the present value for Investment A is higher than Investment B, it suggests that Investment A is the better option when considering the 15% interest rate factoring in the opportunity cost and risk premium.