On January 1, 2017, Dave Coates, a 23-year-old mathematics teacher at Xavier High School, received a tax refund of $1,100. Because Dave didn’t need this money for his current living expenses, he decided to make a long-term investment. After surveying a number of alternative investments costing no more than $1,100, Dave isolated two that seemed most suitable to his needs.
Each of the investments cost $1,050 and was expected to provide income over a 10-year period. Investment A provided a relatively certain stream of income. Dave was a little less certain of the income provided by investment B. From his search for suitable alternatives, Dave found that the appropriate discount rate for a relatively certain investment was 4%. Because he felt a bit uncomfortable with an investment like B, he estimated that such an investment would have to provide a return at least 4% higher than investment A. Although Dave planned to reinvest funds returned from the investments in other vehicles providing similar returns, he wished to keep the extra $50 ($1,100 − $1,050) invested for the full 10 years in a savings account paying 3% interest compounded annually.
As he makes his investment decision, Dave has asked for your help in answering the questions that follow the expected return data for these investments.
|End of Year||A||B|
|2017||$ 50||$ 0|
|2018||$ 50||$ 150|
|2019||$ 50||$ 150|
|2020||$ 50||$ 150|
|2021||$ 50||$ 200|
|2022||$ 50||$ 250|
|2023||$ 50||$ 200|
|2024||$ 50||$ 150|
|2025||$ 50||$ 100|
|2026||$ 1050||$ 50|
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