AW: Suppose you have the following assets

Suppose you have the following assets:

A: Life 2 years, annual worth $3, present worth $8
B: Life 3 years, annual worth $2, present worth $9
C: Life 6 years, annual worth $1.75, present worth $10

Assuming that must provide 6 years of service, buying a series of assets of the same type if necessary, which asset would you choose?

Question options:

  • A
  • B
  • C

Answer:

The Present Worth of each asset is positive therefore that automatically makes each an acceptable investment. Normally to pick between the three based on present worth we would just look at the one with the highest PW value, but that can only be done with they have the same life. In this case the assets have different life spans so we can't use the PW to decide.

This is where annual worth comes in handy, the one with the greatest annual worth value is the investment to choose. In this case that would be Asset A.

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