Scenario: Tom Has Two Investment Options

question 109

Multiple Choice

Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years.
-Refer to the scenario above.Which of the following statements is true?

• A) The discounted value of $3,400 to be received after 5 years is $3,000.
• B) Tom's return from investing in his friend's project is higher than the amount he would receive from the bank after 5 years.
• C) Tom's return from investing in the bank is higher than the amount he would receive from his friend's project after 5 years.
• D) The returns on both investments are likely to be similar, and Tom should be indifferent about investing in either option.

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Definitions:

Founded

The act of establishing something (e.g., a company, organization, or institution) usually at a specific date.

Gold Standard

A monetary system where a country's currency or paper money has a value directly linked to gold, ensuring that the government could redeem any amount of paper money for its value in gold.

Federal Reserve Board

The governing body of the Federal Reserve System, responsible for overseeing the United States' central banking system.

Bretton Woods Agreement

An agreement established in 1944 that set up international financial institutions including the International Monetary Fund (IMF) and the World Bank, and established rules for commercial and financial relations among the world's major industrial states.