You Are Comparing Two Investment Options That Each Pay 5

question 108

Multiple Choice

You are comparing two investment options that each pay 5 percent interest,compounded annually.Both options will provide you with $12,000 of income.Option A pays three annual payments starting with $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?

• A) Both options are of equal value given that they both provide $12,000 of income.
• B) Option A has the higher future value at the end of year three.
• C) Option B has a higher present value at time zero than does option A.
• D) Option B is a perpetuity.
• E) Option A is an annuity.

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Definitions:

Net Income

The conclusive earnings a company retains after all operational costs and taxes are taken away from the revenues.

Statement of Cash Flows

A financial document that provides a summary of the cash inflows and outflows for a company over a specific period of time, showing how it raises and spends money.

Operating Activity

Business actions involving the day-to-day operations that generate revenue and incur expenses in the production of goods or services.

Investing Activity

Transactions involving the purchase and sale of long-term assets and investments, part of a company's cash flow activities.