Matthew is considering several possible investment alternatives: Option A: Matth
ID: 2668129 • Letter: M
Question
Matthew is considering several possible investment alternatives:Option A: Matthew could receive $8,000 today.
Option B: Matthew could receive $2,500 at the end of each of the next four years.
Option C: Matthew could receive $12,000 five years from now.
Required:
1. Calculate the net present value for each option assuming that Matthew can earn 7 percent on any investment funds.
2. Which option results in the greatest financial benefit to Matthew?
3. If Matthew earns 10 percent, will that change your answer to # 2 above? Please explain.
Explanation / Answer
A NPV 8,000 B NPV 2,500/1.07 +2,500/1.07^2 +2,500/1.07^3 +2,500/1.07^4 = 8,468.03 C NPV 12,000/1.07^5= 8,555.83 C is the best Yes A NPV 8,000 B NPV 7,924.66 (same methodology as above only use .10 rather than .07 C 12,000/1.10^5= 7,451.05 A is now the best