Sherman Co$.$ is investing in a machine for $$355$ that will be worth $$400$ in $3$ years. However, an alternative investment for the same amount returns $10\%$ with the same level of risk. Which is the better investment, the machine or the alternative, and why?

Multiple Choice

Comparing the two investments on present value analysis, the machine is overpriced relative to the alternative investment since the PV of $$400$ at $10\%$ is $$300,$ and we are being asked to pay $$335.$ Moreover, the alternative investment's FV of $$335$ in $3$ years is better than the machine.

The machine is the better investment because it returns $$400$ in three years. The alternative investment returns less, even at $10\%$ discount rate.

The answer cannot be determined because we do not know what cash flow the machine investment will generate over $3$ years.

Clearly, the machine is the better investment. Alternative investments are risky and at $10\%,$ this one seems very risky.