A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a three-year period as described below. Based on the wealth maximization goal, the financial manager would

Question

Quizplus · Accepted Answer

To maximize wealth, the financial manager should choose the investment with the highest net present value (NPV). Using a discount rate of 10%, we can calculate the NPVs of each asset as follows:

Asset 1 NPV = $1,000 + ($500 / 1.1) + ($500 / 1.1^2) = $1,609.92
Asset 2 NPV = $500 + ($1,000 / 1.1) + ($1,000 / 1.1^2) = $2,229.21
Asset 3 NPV = $2,000 + ($200 / 1.1) + ($200 / 1.1^2) = $2,238.51

Therefore, Asset 3 has the highest NPV and should be chosen by the financial manager.

A Financial Manager Must Choose Between Three Alternative Investments