You are comparing two investment options that each pay 5 percent interest, compo

Question

You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

Both options are of equal value given that they both provide $12,000 of income. Option A has the higher future value at the end of year three. Option B has a higher present value at time zero than does option A. Option B is a perpetuity. Option A is an annuity.

Explanation / Answer

Option B has a higher present value at time zero than does option A.

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