You are considering two investment options. In option A, you have to invest $4500 now and...

You are considering two investment options. In option A, you have to invest $4500 now and $1000 three years from now. In option B, you have to invest $3500 now, $1000 a year from now, and $1000 three years from now. In both options, you will receive four annual payments of $2000 each (you will get the first $2000 payment a year from now). Which of these two options would you choose based on AE criterion? Assume the interest rate is 10%.

Note: find the AE for both projects. Include the annual revenues in AE calculations. Show your calculations.

Expert Solution

Solution :

The Annual Equivalent of Option A = $ 343.36

The Annual Equivalent of Option B = $ 372.04

Since the Annual Equivalent of Option B at $ 372.04 is higher, the Option B should be chosen.

Thus based on AE Criterion Option B should be chosen.

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 2 days ago

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