Question

You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?
a. Option A is preferable because it is an annuity due.
b. Both options are of equal value given that they both provide $20,000 of income.
c. Option A is the better choice of the two given any positive rate of return.
d. Option B has a lower future value at year 5 than option A given a zero rate of return.
e. Option B has a higher present value than option A given a positive rate of return.

Answer 1

Answer:C. Option A is the better choice of the two given any positive rate of return.

Explanation:An investment is an asset bought in order to gain or generate returns from it over time. Any investment is expected to give higher returns when compared to the initial money put into the business.

The rate of return of an investment is the rate at which the investment generates revenue or net income,

Option A is better compared to option B as it gives a higher rate of income in the first initial payment,this higher first payment will enable the investor to utilize the money for something tangible compared with Option B which gives $4000 first net income.

Answer 2

Answer:

Option A is the better choice of the two given any positive rate of return.

Explanation: