Tanner Is Choosing Between Two Investment Options

question 119

Multiple Choice

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?

• A) $531.40 later today, since $1 today is worth more than $1 in one year.
• B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested.
• C) Neither - both investments have a negative NPV.
• D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.

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Definitions:

UCC

The Uniform Commercial Code, a comprehensive set of laws governing all commercial transactions in the United States, intended to harmonize the laws of sales and other commercial transactions across state lines.

Recover Damages

The action of obtaining compensation through legal means for loss or injury.

Design Defect

A flaw in the planned design of a product, making it inherently unsafe for its intended or reasonably foreseeable use.

Manufacturing Defect

A flaw in a product that originates from the manufacturing process, making it dangerous or unusable.