Question

Investment A costs $10,000 today and pays back $11,500 two years from now. Investment B costs $8,000 today and pays back $4,500 each year for two years. If an interest rate of 5% is used, which alternative is superior

Answer 1

Answer:

Investment  A

Explanation:

We need to find the NPV of two investments

NPV (A) = -10000 + 11500(P/F, 5%, 2)

= -10000 + 11500*0.90703

= 431

NPV (B) = -8000 + 4500(P/A, 5%, 2)

= -8000 + 4500*1.8594

= 367

Since NPV (A) > NPV (B) we select alternative A.