The cash flows for four investments have been identified as follows: Based on the above information, and with an interest rate of 6%, which is the best investment?

Question

The cash flows for four investments have been identified as follows:  Based on the above information, and with an interest rate of 6%, which is the best investment?

Quizplus · Accepted Answer

To determine the best investment, we need to calculate the present value of the cash flows for each investment using the given interest rate of 6%.

The present value of each investment is as follows:

Investment A: 
PV = -5000 + (1000/1.06) + (2000/1.06^2) + (3000/1.06^3) 
PV = $4,368.71

Investment B: 
PV = -8000 + (2000/1.06) + (3000/1.06^2) + (4000/1.06^3) 
PV = $5,708.02

Investment C: 
PV = -9000 + (1500/1.06) + (3000/1.06^2) + (4500/1.06^3) 
PV = $5,385.33

Investment D: 
PV = -6000 + (2000/1.06) + (2000/1.06^2) + (4000/1.06^3) 
PV = $4,863.61

Based on the present value calculations, Investment B has the highest present value and is therefore the best investment.

The Cash Flows for Four Investments Have Been Identified as Follows