You Are Comparing Two Investment Options

question 25

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:

Impulsive

Impulsive describes a tendency to act quickly on desires and feelings without considering the consequences.

Panic Disorder

A psychiatric disorder characterized by unexpected and repeated episodes of intense fear accompanied by physical symptoms that may include chest pain, heart palpitations, shortness of breath, dizziness, or abdominal distress.

Intense Fear

An overwhelming and often irrational sense of apprehension or panic, usually in response to a specific stimulus or situation.

Palpitations

Uncomfortably noticeable heartbeats that are unusually strong or irregular, often perceived as a pounding, fluttering, or racing sensation.