A lump sum of $5,000 is invested at 10% per year for five years.The company's cost of capital is 8%.Which is true?

A) The investment has a future value of $7,347
B) The investment has a future value of $8,053
C) The investment has a present value of $5,000
D) The investment has a net present value of $5,000
E) None of the above

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Jordan Nicole · Accepted Answer

Final Answer : B, Explanation :  We can calculate the future value of the investment using the formula FV = PV * (1 + r)^n, where PV is the present value (the lump sum of $5,000), r is the annual interest rate (10%), and n is the number of years (5).FV = 5,000 * (1 + 0.10)^5 = 8,053.So, the investment has a future value of $8,053 after five years. Since the company's cost of capital is only 8%, this investment is generating a return that exceeds their cost of capital, making it a good investment. Choice A and C are both incorrect because the investment has a future value of $8,053, not $7,347 (A), and it is not the present value of the investment, it is the amount it will be worth at the end of five years. Choice D is also incorrect because the net present value (NPV) of an investment takes into account the present value of future cash flows and the initial investment, and it is not equal to the initial investment in this case. Choice E is incorrect because choice B is true.

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