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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.

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