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14 October, 16:49

Investment A costs $10,000 today and pays back $11,500 two years from now. Investment B costs $8,000 today and pays back $4,500 each year for two years. If an interest rate of 5% is used, which alternative is superior

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  1. 14 October, 17:13
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    Investment A

    Explanation:

    We need to find the NPV of two investments

    NPV (A) = - 10000 + 11500 (P/F, 5%, 2)

    = - 10000 + 11500*0.90703

    = 431

    NPV (B) = - 8000 + 4500 (P/A, 5%, 2)

    = - 8000 + 4500*1.8594

    = 367

    Since NPV (A) > NPV (B) we select alternative A.
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