Question

Of the following investments, which would have the highest present value? Assume that the effective annual...

Of the following investments, which would have the highest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Group of answer choices

Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).

Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays $2,500 at the end of 10 years (just one payment).

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Homework Answers

Answer #1

Effective Annual Rate (EAR) is assumed at 10%.

Equivalent semi annual rate= (1+10%)^(1/2)-1 = 4.880885%

Present value of various investments given are as follows:

Investment A: $1,536.14

Investment B: $1,959.65

Investment C: $2,007.48

Investment D: $963.86

This shows that of the given choices, investment C (which pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments) gives the highest present value.

Calculations as below:

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