Answer:
Answer choice b - Option B has a higher present value at time zero is the correct answer.
Explanation:
Option B has a higher present value at time zero is correct
as shown below:
At the end of three years, option A future value = 2000*(1.06)^2+5000*(1.06)^1+5000*(1.06)^0= $12,547
At the end of three years, option B future value = 4000*(1.06)^2+4000*(1.06)^1+4000*(1.06)^0=$12,734
From the calculation above, option B has higher future value, so the first option is wrong.
At time zero, option A present value = 2000/(1.06)^1+5000/(1.06)^2+5000/(1.06)^3= $10,535
At time zero, option B present value = 4000/(1.06)^1+4000/(1.06)^2+4000/(1.06)^3=$10,692
From the calculation above, option B has higher present value, so second option is correct.
The third option is wrong as Option B is not perpetuity as B has three years of life.
The fourth option is wrong as Option A is not annuity as cash flow, amounts is not equal, it varies on an annual basis.