connect al Review Questions (ch. 2,3,5 Question 29 (of 30) Tom offers you an Inv

Question

connect al Review Questions (ch. 2,3,5 Question 29 (of 30) Tom offers you an Investment with a future value interest factor (FVF) of 2. Kaya offers you a second investment opportunity with a present value interest factor PMF)of 0.5. Assuming both investments are for 3 years and represnt the same amount of rnsk, which is the better Investment? O Tom's because it has the higher future value factor Kaya's because it has the higher future value factor O There is no way to compare the two investments because one uses the P/r and the other the EVe. O They are identical since they both offer the same Fv O Kaya's becouse it has the lower present value factor O Tom's because it has the higher present value factor Previous attemot

Explanation / Answer

Let the investment amount for each investment option be $ 100

Tom's Investment provides a FVIF of 2 which implies that the investment value becomes double after three years.

Kaya's Investment provides a PVIF of 0.5 which implies that the final investment proceeds, when discounted to the present, would be half of the final investment proceeds.

Therefore, for Kaya's Investment: 100 = 0.5 x Final Investment Proceeds

Tom's Final Investment Proceeds = 100 x PVIF = 100 x 2 = $ 200

Kaya's Final Investment Proceeds = 100 / 0.5 = $ 200

Hence, both investments are equivalent as they both have the same FVIF.

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