You are given two choices of investments, investment a and investment b. both investments have the same future cash flows. investment a has a discount rate of 4%, and investment b has a discount rate of 5%. which of the following is true?
a. the present value of cash flows in investment a is lower than the present value of cash flows in investment b.
b. the present value of cash flows in investment a is higher than the present value of cash flows in investment b.
c. the present value of cash flows in investment a is equal to the present value of cash flows in investment b.
d. no comparison can be madelong dash—we need to know the cash flows to calculate the present value.

The answer is: B) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.

Explanation:

The present value of a cash flow is the current value of a future amount of money discounted by an specific rate of return.

Both investments will have the same cash flows, but investment B has a higher discount rate than investment A. The cash flows of investment A will have a higher present value than the cash flows of investment B.

For example, both investments A and B have a future cash flow of $100, but investment A has a discount rate of 4% while investment B has a discount rate of 5%.

The present value of the cash flow for investment A is $96.15 (= $100 / 1.04)

The present value of the cash flow for investment B is $95.24 (= $100 / 1.05)

answer; conceptual skills;

riley- $3

sean- $4

jake- $8

riley has the absolute advantage.