Assume that two investments have a three-year life and generate the cash flows shown below. Which of the two would you prefer? Year Investment A Investment B
1 $5,000 $8,000
2 $5,000 $5,000
3 $5,000 $2,000
A) Investment A, since it has the most even cash flows
B) Investment B, since it gives you the largest cash flows in earlier years
C) Neither, since they both have equal lives
D) Both investments are equally attractive

Question

Quizplus · Accepted Answer

Investment B generates larger cash flows in the earlier years, which could provide a higher return on investment in a shorter period of time. In addition, the total cash flows for both investments are the same, so Investment B is the preferred choice.

Assume That Two Investments Have a Three-Year Life and Generate