An Investor Is Considering the Two Investments Shown Above

question 64

Multiple Choice

$\begin{array} { l c c c c } \text { Time: } & 0 & 1 & 2 & 3 \\\text { Investment A: } & - \$ 1 \text { million } & \$ 300,000 & \$ 400,000 & \$ 500,000 \\\text { Investment B: } & - \$ 1 \text { million } & \$ 500,000 & \$ 400,000 & \$ 300,000\end{array}$
An investor is considering the two investments shown above. Her cost of capital is 9%. Which of the following statements about these investments is true?

• A) The investor should take investment B since it has a greater net present value (NPV).
• B) The investor should take investment B since it has a greater internal rate of return (IRR).
• C) The investor should take investment A since it has a greater net present value (NPV).
• D) The investor should take investment A since it has a greater internal rate of return (IRR).

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Definitions:

Projected Benefit Obligation

A liability amount that represents an estimate of the total future pensions benefits earned by employees, adjusted for expected future salary increases.

Pension Benefit Guaranty Corporation

A U.S. government agency that protects the retirement incomes of American workers in private sector defined benefit pension plans.

Defined Benefit Pension Plans

Retirement plans promising a specific benefit at retirement, which is usually calculated through formulas involving salary and years of service.

Other Postretirement Benefits

Benefits, other than pensions, provided to employees after they retire, such as health insurance.