Investment A costs $10000 today and pays back $11500 two years from now. Investment B costs $8000 today and pays back $ 4500 each year for two years. If an interest rate of 5% is used. Which alternative is better

Investment A costs $10000 today and pays back $11500 two years from now. Investment B costs $8000 today and pays back $ 4500 each year for two years. If an interest rate of 5% is used. Which alternative is better

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 19E

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

• Investment A costs $10000 today and pays back $11500 two years from
now. Investment B costs $8000 today and pays back $ 4500 each year for
two years. If an interest rate of 5% is used. Which alternative is better

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