You are comparing two investment options that each pay 5% interest compounded annually. Both options will provide
you with $12000 of income. Option A pays 3 annual payments with $2000 the first year followed by 2 annual payments of $5000 each. Option B pays 3
annual payments of $4000 each. Which one of the following statement is correct given these two investment options?
Answer
Both options are of equal value given that they both provide $12000 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.