You Are Comparing Two Investment Options

question 97

Multiple Choice

You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

• A) Both options are of equal value given that they both provide $20,000 of income.
• B) Option A is the better choice of the two given any positive rate of return.
• C) Option B has a higher present value than option A given a positive rate of return.
• D) Option B has a lower future value at year 5 than option A given a zero rate of return.
• E) Option A is preferable because it is an annuity duE.

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Definitions:

Bonds Payable

A liability companies incur when issuing debt securities to investors, repayable at a future date.

Fair Value

An estimation of the price at which an asset or liability could be traded in an orderly transaction between knowledgeable, willing parties.

Unrealized Profits

Profits that have been generated on paper through an investment's increased value but have not yet been realized through a sale.

Intercompany Sales

The internal sale of products or services between related entities within the same corporate structure, aiming to streamline operations and optimize resources.