A Firm Has Four Different Investment Options

question 152

Multiple Choice

A firm has four different investment options.Option A will give the firm $10 million at the end of one year,$10 million at the end of two years,and $10 million at the end of three years.Option B will give the firm $5 million at the end of one year,$10 million at the end of two years,and $15 million at the end of three years.Option C will give the firm $15 million at the end of one year,$10 million at the end of two years,and $5 million at the end of three years.Option D will give the firm $21 million at the end of one year,nothing at the end of two years,and $9 million at the end of three years.Which of these options has the highest present value if the rate of interest is 5 percent?

• A)Option A
• B)Option B
• C)Option C
• D)Option D

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Definitions:

Capital Balances

The amount of owners' equity or shareholders' equity in a business, reflecting the residual assets after deducting liabilities.

Share of the Profit

The portion of a company's earnings allocated to each outstanding share of common stock, illustrating the company's profitability on a per share basis.

Average Capital Balances

An average of the various amounts of capital held in an account over a specific period, often used to calculate interest or allocate profits and losses in partnerships.

Interest Allowance Method

A method used in accounting to allocate interest expense over the life of a debt at a constant rate.