Investment X and Investment Y Are Both Growing Perpetuities with Initial

question 38

Multiple Choice

Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true?

• A) Investment X has a higher growth rate than Investment Y.
• B) Investment X has a lower growth rate than Investment Y.
• C) The answer cannot be determined without knowing the interest rate for both investments.
• D) With the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value.

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Definitions:

General Purpose Machines

Machines designed to perform a variety of tasks, as opposed to specialized machines which are designed for a specific task.