A Company Has Identified the Following Investments as Looking Promising

question 23

Multiple Choice

A company has identified the following investments as looking promising.Each requires an initial investment of $1.2 million.Which is the best investment?

• A)a perpetuity that generates a cash flow at the end of year 1 of $100,000,has a growth rate of 1.25%,and a cost of capital of 10%
• B)a perpetuity that generates a cash flow at the end of year 1 of $800,000,has a growth rate of 2.25%,and a cost of capital of 12%
• C)an investment that generates a cash flow of $400,000 at the end of each of the next five years,when the cost of capital is 6%
• D)an investment that generates a cash flow of $200,000 at the end of each of the next ten years,when the cost of capital is 6%

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Definitions:

Year-End Assets

The total value of all assets held by an individual or entity at the conclusion of a financial year.

Liabilities

Financial obligations or debts owed by a business or individual.

Equity Mutual Funds

Investment funds that pool money from various investors to purchase a diversified portfolio of stocks.

Fixed-Income Securities

Investments that provide regular income payments, such as bonds or treasury bills, with predetermined interest rates.