You Are Given Two Choices of Investments,Investment a and Investment

question 99

Multiple Choice

You are given two choices of investments,Investment A and Investment B.Both investments have the same future cash flows.Investment A has a discount rate of 4%,and Investment B has a discount rate of 5%.Which of the following is TRUE?

• A)The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
• B)The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B.
• C)The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B.
• D)The present value of cash flows in Investment A is half the present value of cash flows in Investment B.
• E)No comparison can be made - we need to know the cash flows to calculate the present value.

---

Definitions:

Net Cash Inflows

The total cash receipts minus cash payments over a period of time from operational, financial, and investing activities.

Profitability Index

A financial metric that measures the return on a project or investment relative to its cost, calculated by dividing the present value of future cash flows by the initial investment cost.

Internal Rate

Typically refers to the internal rate of return (IRR), which is a financial metric used to estimate the profitability of potential investments.

Payback Period

The amount of time it takes for an investment to generate cash flows sufficient to recover its initial cost, commonly used to assess the feasibility of projects.