Your grandmother has offered to give you money for an investment provided you can choose the best investment alternative. Listed below is information concerning the cash flows of Investment A and Investment B, both of which earn an annual interest rate of 12% and require the same initial investment? Show all computations.

Investment A Investment B

Year 1 1,000 5,000

Year 2 2,000 4,000

Year 3 3,000 3,000

Year 4 4,000 2,000

Year 5 5,000 1,000

TOTAL 15,000 15,000

1. Which investment alternative will you choose?

2. Why is your investment choice worth more than the alternative choice?

What is the Net Present Value of Investment A compared to Investment B? Given that we are presented with a series of UNEQUAL cash flows for each investment.

A refinement on PV is the Net Present Value Method. NPV compares the present value of the cash inflows to the present value of the cash outflows for an investment project. If the net is positive or zero, the project is acceptable. If the net is negative the project is unacceptable. A positive NPV means the project earns a higher rate of return than the required rate of return. A zero NPV means the project%u2019s rate of return is equal to the required rate. And, a negative NPV means the project earns a return that is less than the required rate.