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 6.58% 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

Alternative 2 and Alternative 3 have the same present value of $417,000. Alternative 1 has a present value of $416,999. Therefore, Jasmine's most preferred option is Alternative 2 or Alternative 3.

Jasmine Has Two Investment Choices