You Are Comparing Two Investment Options That Each Pay 6

question 57

Multiple Choice

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)  

• A) Both options are of equal value since they both provide $12,000 of income. 
• B) Option A has the higher future value at the end of Year 3. 
• C) Option B has a higher present value at Time 0. 
• D) Option B is a perpetuity. 
• E) Option A is an annuity. 

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Definitions:

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how much the values in a data set differ from the mean.

Forecast Error

The difference between the predicted value and the actual value observed, often used in the context of demand or sales forecasting.

Expected Profit

The anticipated monetary gain from business activities, calculated by multiplying the probability of various outcomes by their respective profits and summing the results.

Expected Understock

Anticipated situations where inventory levels are not sufficient to meet customer demand.