Question

You are comparing two investment options, each of which will provide $15,000 of total income. Option A pays five annual payments starting with $5,000 the first year followed by four annual payments of $2,500 each. Option B pays five annual payments of $3,000 each. Which one of the following statements is correct given these two investment options?

a.) Given a positive rate of return, Option A is worth more today than Option B.
b.) Option A is preferable because it is an annuity due.
c.) Option B has a higher present value than Option A given a positive rate of return.
d.) Both options are of equal value today.
e.) Option B has a lower present value than Option A given a zero rate of return.

Answer 1

A

Step-by-step explanation:

Because as per time the value of money the future cash holds are discounted at discount rate yo find the present Worth, thus the higher value of early present cash flows creates higher present value compared to lower value of early cash flows