Mr.Green is considering four possible investment opportunities,each of which would cost him $5,000.He expects annual returns on these investments of $600,$500,$400,and $300.If the interest rate is 7 percent,how many of these opportunities should Mr.Green undertake?
A)one
B)two
C)three
D)four
E)none

Question

Quizplus · Accepted Answer

To determine the best choice(s), we need to calculate the present value of the annual returns for each investment opportunity using the formula:

PV = Annual Return / (1 + r)^n

where PV is the present value, r is the interest rate, and n is the number of years.

For Investment 1, PV = 600 / (1 + 0.07)^1 = $560.75 
For Investment 2, PV = 500 / (1 + 0.07)^1 = $467.29 
For Investment 3, PV = 400 / (1 + 0.07)^1 = $373.83 
For Investment 4, PV = 300 / (1 + 0.07)^1 = $280.38

If Mr. Green invests in all four opportunities, his total cost would be $20,000 and his total present value of returns would be $1682.25. However, if he only invests in the first three opportunities, his total cost would be $15,000 and his total present value of returns would be $1402.87. Therefore, it would be best for Mr. Green to invest in three opportunities, which are the ones that offer the highest present value of returns (i.e. Investments 1, 2, and 3).

MrGreen Is Considering Four Possible Investment Opportunities,each of Which Would