Question
You are choosing between two investments of equal risk. You believe that given the risk, the appropriate discount rate to use is 9%. Your initial
You are choosing between two investments of equal risk. You believe that given the risk, the appropriate discount rate to use is 9%. Your initial investment (outflow) for each is $6,000. The first investment is expected to pay out $10,000 three years from now; the second investment is expected to pay out $13,500 five years from now. (a) Which investment should you chose and why? Show calculations.
(b) You are choosing between the same two investments, but you have reassessed their risks. You now consider the five-year investment to be more risky than the first and estimate that a 15% return (discount rate) is required to justify making this investment. The first investment remains at 9%. Which investment should you choose and why? Show calculations.
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