A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment?

Question

Quizplus · Accepted Answer

To determine the best investment, we need to calculate the present value (PV) of each investment option and choose the option with the highest present value. Using the PV formula, we get:

PV of Option A = (800,000/(0.12-0.0225)) / (1+(0.12-0.0225))^1 = $6,118,012
PV of Option B = 400,000 * ((1-1/(1+0.06)^5)/0.06) = $1,791,219
PV of Option C = (100,000/(0.10-0.0125)) / (1+(0.10-0.0125))^1 = $1,042,334
PV of Option D = 200,000 * ((1-1/(1+0,06)^10)/0,06) = $1,597,853

Option B has the highest present value of $1,791,219, making it the best investment choice. Option A has a higher present value, but it also has a much higher cost of capital which reduces its worth.

A Company Has Identified the Following Investments as Looking Promising