# Financial management: comparing two investment options

You are comparing two investment options. Cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8000 the first year followed by four annual payments of $3000 each. Option B pays five annual payments of $4000 each. Which of the 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 is the better choice of the two given any positive rate of return

C. Option B has a higher present value than Option A given a positive rate of return

D. Option B has a lower future value at year 5 than Option A given a zero rate of return

E. Option A is preferable because it is an annuity due

2. You just purchased some MACRS 5 year property at a cost of $230,000. Which of the following will correctly give you the book value of this equipment at the end of year 2?

MACRS 5 Year Property

Year Rate

1 20%

2 32%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

I. 52% of the asset cost

II. 48% of the asset cost

III. 68% of 80% of the asset cost

IV. The asset cost, minus 20% of the asset cost, minus 32% of 80% of the asset cost

a. II only

b. III and IV only

c. I and III only

d. II and IV only

e. I, II, III, IV

(Please provide explanation and detailed solution to the problem)

#### Solution Preview

You are comparing two investment options. Cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8000 the first year followed by four annual payments of $3000 each. Option B pays five annual payments of $4000 each. Which of the 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 is the better choice of the two given any positive rate of return ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer which of the statements is correct given these two investment options.