Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
-Refer to the scenario above.If the investor plans to invest a sum of $4,000,the net present value of Option A is ________.

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of each option, the formula NPV = FV / (1+r)^n is used, where FV is the future value, r is the annual interest rate, and n is the number of years.

For option A: NPV = 4000 / (1+0.09)^6 = $2,510.11

For option B: NPV = 7600 / (1+0.09)^7 = $4,202.35

For option C: NPV = 9000 / (1+0.09)^8 = $4,471.80

Therefore, if the investor plans to invest $4,000, the best option would be option B as it has the highest NPV.

Scenario: an Investor Is Considering Three Different Investment Options