Two alternatives have the following cash flows At a 5 intere

Two alternatives have the following cash flows: At a 5% interest rate, which alternative should be selected? Neither A or B A Both A and B |B

Solution

There are 2 investment options. Their details are worked out as under:

A further comparison of the two investments is as under:

Thus, the percentage of additional return ( apart from interest) being better in the option A, it should be preferred over option B. The 2nd answer is correct.

	Option A	Option B
Amount of investment($)	2000	2800
Interest for 1st year	100	140
Balance	2100	2940
Payback after 1st year	800	1100
Balance	1300	1840
Interest for the 2nd year	65	92
Balance	1365	1932
Payback after 2nd year	800	1100
Balance	565	832
Interest for the 3rd year	28.25	41.60
Balance	593.25	873.60
Payback after 3rd year	800	1100
Additional Return	206.75	226.40
Total	2400	3300