Suppose two alternative investments promise cash flow streams that possess equal

Question

Suppose two alternative investments promise cash flow streams that possess equal lives. Further, suppose the simple sum (adding up the cash flows) is the same for each investment. Given a positive interest rate, which investment has the largest present value? Select one: a. There is no reliable relationship between the distribution of cash flows and present value. b. An investment which generates equal cash flows each period. c. An investment that is being discounted by a small discount rate. d. An investment which generates most cash flows at the end of its life e. An investment which generates most cash flows at the beginning of its life.

Explanation / Answer

For making capital budgeting decision major factor to consider is the value of initial investment, value of future cash flows, tenure of investment, frequency of cash flows, discount rate.

Two project with equal life and sum of cash flows of two project is equal. In this case present value of future cash flow is greater for that investment whose discount rate is small and whose investment which generates most cash flows at the beginning of its life.

Hence, correct answer is option (C) and (E) is correct answer.

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