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 statement is correct given these two investment options?

Question

Quizplus · Accepted Answer

Option A is the better choice because it provides a larger sum of money earlier than Option B. In terms of present value, receiving money earlier is more valuable than receiving the same amount later, assuming a positive rate of return. This is because the earlier payments can be reinvested to earn additional returns.

You Are Comparing Two Investment Options