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:

Past Experience

Refers to the knowledge or skills a person has gained through previous work, education, or life situations.

Neutral Value

A concept or belief that is perceived to be impartial, lacking a predisposition towards a positive or negative judgment.

Positive Reinforcer

A stimulus that, when introduced following a behavior, increases the likelihood of that behavior occurring again in the future.

Aversive Event

An event that is unpleasant or undesirable and often leads to negative reactions or behaviors in an effort to avoid it.