Jasmine has two investment choices. Alternative 1 requires an immediate outlay of $150 000 and offers a return of $417 000 after seven years. Alternative 2 requires an immediate outlay of $180 000 in return for which $25 000 will be received at the end of every six months for the next seven years. Alternative 3 requires an immediate outlay of $200 000 in return for which $60 000 will be received at the end of every year for the next seven years. The required rate of return on investment is 7.4% compounded semi-annually. What is Jasmine's most preferred option?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Alternative 3 or Alternative 2, as both are essentially same
E) Alternative 1 or Alternative 2, as both are essentially same

Question

Quizplus · Accepted Answer

To determine Jasmine's most preferred option, we calculate the Net Present Value (NPV) of each alternative using the given rate of return of 7.4% compounded semi-annually. Alternative 2 offers the highest NPV due to the consistent semi-annual returns over seven years, which, when discounted at the given rate, outweigh the initial outlay compared to the lump sum returns of Alternatives 1 and 3.

Jasmine Has Two Investment Choices