Investment Options a and B Are Equally Risky and Have

question 62

Multiple Choice

Investment options A and B are equally risky and have identical initial costs.Each investment will produce cash inflows of $20,000.Option A will pay $8,000 the first year followed by four annual payments of $3,000 each.Option B will pay five annual payments,starting in 1 year,of $4,000 each.Which one of the following statements is correct given these two investment options? Assume a positive rate of return.

• A)Neither investment should be undertaken.
• B)Option A is the better investment.
• C)Option B has a higher net present value.
• D)Option B has a lower future value at Year 5.
• E)Both options are of equal value.

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Definitions:

Tighter Collection

Refers to the implementation of more stringent policies or practices to accelerate the collection of receivables.

Collection Policy

Guidelines and procedures set by a company to manage and collect accounts receivable, or the money owed by customers.

Working Capital

The difference between a company's current assets and current liabilities, indicating the liquidity available to run its operations.

Compensating Balances

A minimum account balance that a company agrees to maintain in a bank account to offset the cost of banking services provided.