As the table below indicates, MCC should consider making the share investment because this will allow MCC to have more money after eighteen months. However, since shares tend to be risky and the estimated future share price is not guaranteed, the bond investment likely makes more sense, especially as the future value amounts are not that different to justify the extra risk of owning the shares. However, if interest rates rise, the value of the bond may also decline. Bonds are not a risk free investment either. [Assuming investment risk of Bond and Share is the same (i.e., they have the same discount rate of 12%), evaluate which investment is better from cashflow alone]

Solution [by your assistant] Share is a better investment

Bond Investment				Share Investment
Semi-annual Periods	Semi-annual Bond Interest 7%	Future Value Factor @ 12%/2 =6%	Future Value	Quarterly Periods	Quarterly Dividend	Future Value Factor @ 12%/4 = 3%	Future Value
1	$35,000.00	1.1236	$39,326.00	1	$12,500.00	1.1593	$14,491.25
2	35,000.00	1.0600	37,100.00	2	12,500.00	1.1255	14,068.75
3	35,000.00	1.0000	35,000.00	3	12,500.00	1.0927	13,658.75
			-	4	12,500.00	1.0609	13,261.25
			-	5	12,500.00	1.0300	12,875.00
				6	12,500.00	1.0000	12,500.00
Principal	500,000.00	1.0000	500,000.00		531,250.00	1.0000	531,250.00
Future value			$611,426.00				$612,105.00

This is your TVM quiz.

Your assistant provided you with his analysis of Bond vs Share investment and concluded Share is a better investment because of higher future value over the same 18-month period.

However, you recall faintly one Bob Chow said always compare alternatives on present value basis. To resolve this conundrum you ask your assistant (an A student in KPU Acct 3380) to write a report on the bond-vs-share issue. In particulars, you have to:

1. Calculate present value of cashflow of Bond and Share respectively, and
2. Explain why present value comparison might result in different /or same conclusion?