AW: Not Really AW

Suppose you have two assets. Asset A earns you \$10 per period for periods 1 through 3. Asset B earns you \$9 per period for periods 1 through 20.

Which asset would you choose when the interest rate is 10% and there is no requirement to provide service.

(A)

(B)

Solution:

This question ask us to calculate the present worth of two asssts.

Also,the sentence, there is no requirement to provide service, in the question mease that this is exclusive criteria, so we need to pick the one with the largest Present Worth between them.

• Present Worth: (P|A,i,N), P=A[((1+i)^N−1)/(i(1+i)^N)]

So, Asset A (PW(10%))= \$10[((1+0.1)^3−1)/(0.1(1+0.1)^3)] = \$ 24.86852 = \$ 24.87

Asset B (PW(10%))= \$9[((1+0.1)^20−1)/(0.1(1+0.1)^20)] = \$ 76.622073 = \$ 79.62

Now, we should pick the one with the largest Present Worth between them.

Therefore, Asset B would be choson. The answer is B

page revision: 4, last edited: 17 Nov 2015 16:35
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