Tanner Is Choosing Between Two Investment Options

question 38

Multiple Choice

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

• A)$550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested.
• B)$531.40 later today, since $1 today is worth more than $1 in one year.
• 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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