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# Capital Budgeting

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You are comparing two investment options. The cost to invest in either option is the same today. Both options provide you with \$20,000 of income. Option A pays five annual payments of \$4,000 each. Option B pays five annual payments starting with \$8,000 the first year followed by four annual payments of \$3,000 each. Which one of the following statements is correct given these two investment options?

A. Both options are of equal value given that they both provide \$20,000 of income.
B. Option A has a higher present value than option B given any positive rate of return.
C. Option B has a higher present value than option A given any positive rate of return.
D. Option B has a lower future value at year 5 than option A given a zero rate of return.

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Solution:

Since both investments cost the same and produce the same total income of \$20,000. The question becomes, how soon is the ...

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Analyzing Investment Options

\$2.19