Which of the following investments has a higher present value,assuming the same (strictly positive)interest rate applies to both investments?

A)Investment X has a higher present value.
B)Investment Y has a higher present value.
C)Investment X and Investment Y have the same present value,since the total of the cash flows is the same for both.
D)No comparison can be made - we need to know the interest rate to calculate the present value.

Question

Which of the following investments has a higher present value,assuming the same (strictly positive)interest rate applies to both investments?

A)Investment X has a higher present value. 
B)Investment Y has a higher present value. 
C)Investment X and Investment Y have the same present value,since the total of the cash flows is the same for both. 
D)No comparison can be made - we need to know the interest rate to calculate the present value.

Quizplus · Accepted Answer

Investment Y has a higher present value because it has higher cash flows in the earlier years, which are valued more highly due to the effect of compounding at a positive interest rate. Therefore, even though the total cash flows for both investments are the same, the timing and size of those cash flows affects the present value calculation. Without knowing the interest rate, we cannot calculate the exact present value, but we can still compare the relative present values of the two investments based on the timing and size of their cash flows.

Which of the Following Investments Has a Higher Present Value,assuming