Assume that your firm wants to choose between two project options:
• Project A: $500,000 invested today will yield an expected income stream of $150,000 per year for 5 years, starting in Year 1.
• Project B: an initial investment of $400,000 is expected to produce this revenue stream: Year 1 = 0, Year 2 = $50,000, Year 3 = $200,000, Year 4 = $300,000, and Year 5 = $200,000.
Assume that a required rate of return for your company is 10% and that inflation is expected to remain steady at 3% for the life of the project. Which is the better investment? Why?