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Consider three alternatives A, B, and "do-nothing.' (a) Construct a choice table for interest rates from 0% to 100%. Year A B 0 1-5 -$10,000 3,200 -$15,000 4,500

Consider three alternatives A, B, and "do-nothing.' (a) Construct a choice table for interest rates from 0% to 100%. Year A B 0 1-5 -$10,000 3,200 -$15,000 4,500

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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### Investment Alternatives Analysis When considering various investment options, it’s important to evaluate the potential financial outcomes over time. In this scenario, we are presented with three investment alternatives: A, B, and the option to "do nothing." #### Scenario Description - **Objective:** Construct a choice table for interest rates ranging from 0% to 100%. - **Alternatives:** Investment A, Investment B, and “do-nothing.” #### Data Summary | **Year** | **A** | **B** | |----------|----------------|----------------| | 0 | \(-\$10,000\) | \(-\$15,000\) | | 1-5 | \$3,200 | \$4,500 | #### Explanation - **Year 0**: This represents the initial investment amount. - **A** requires an initial investment of \(\$10,000\). - **B** requires an initial investment of \(\$15,000\). - **Years 1 to 5**: These represent the annual returns. - **A** has an annual return of \$3,200. - **B** has an annual return of \$4,500. ### Choice Table Construction To evaluate the investments, a choice table can be constructed to include the net present value (NPV) of each alternative under different interest rates ranging from 0% to 100%. This analysis helps in understanding the profitability and suitability of each investment based on varying interest rates. #### Net Present Value (NPV) Calculation NPV calculations will consider: - The initial outlay (negative cash flow at Year 0) - Annual cash inflows for years 1 through 5 - Discount rate representing the interest rate (ranging from 0% to 100%) By conducting this analysis, investors can make informed decisions based on different economic scenarios and interest rate environments. ### Conclusion Choosing the right investment requires a detailed understanding of the initial costs, expected annual returns, and the impact of interest rates. This analysis is fundamental in making data-driven financial decisions.
Transcribed Image Text:### Investment Alternatives Analysis When considering various investment options, it’s important to evaluate the potential financial outcomes over time. In this scenario, we are presented with three investment alternatives: A, B, and the option to "do nothing." #### Scenario Description - **Objective:** Construct a choice table for interest rates ranging from 0% to 100%. - **Alternatives:** Investment A, Investment B, and “do-nothing.” #### Data Summary | **Year** | **A** | **B** | |----------|----------------|----------------| | 0 | \(-\$10,000\) | \(-\$15,000\) | | 1-5 | \$3,200 | \$4,500 | #### Explanation - **Year 0**: This represents the initial investment amount. - **A** requires an initial investment of \(\$10,000\). - **B** requires an initial investment of \(\$15,000\). - **Years 1 to 5**: These represent the annual returns. - **A** has an annual return of \$3,200. - **B** has an annual return of \$4,500. ### Choice Table Construction To evaluate the investments, a choice table can be constructed to include the net present value (NPV) of each alternative under different interest rates ranging from 0% to 100%. This analysis helps in understanding the profitability and suitability of each investment based on varying interest rates. #### Net Present Value (NPV) Calculation NPV calculations will consider: - The initial outlay (negative cash flow at Year 0) - Annual cash inflows for years 1 through 5 - Discount rate representing the interest rate (ranging from 0% to 100%) By conducting this analysis, investors can make informed decisions based on different economic scenarios and interest rate environments. ### Conclusion Choosing the right investment requires a detailed understanding of the initial costs, expected annual returns, and the impact of interest rates. This analysis is fundamental in making data-driven financial decisions.
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