Investment X is an example of a_________ cash flow and Investment Y is an example of ________ cash flow [table]
Year | Investment X | Investment Y
1 | $5 000 | $5 000 2 | $7 000 | $5 000 3 | $9 000 | $5 000 4 | $11 000 | $5 000
[/table]

Question

BlackTom AI · Accepted Answer

Start by identifying the pattern of cash flows for each investment. For Investment X, the yearly receipts are 5,000; 7,000; 9,000; and 11,000. These amounts increase every year and are not the same across periods, so X exhibits unequal cash flows rather than a fixed series. For Investment Y, the yearly receipts are 5,000 in each year (5,000, 5,000, 5,000, 5,000). This consistent, identical payment in every period is the hallmark of an annuity, which is defined as a level series of payments over time.

Now evaluate each option:
- Option a: Perpetuity; Unequal cash flow. A perpetuity provides infinite equal payments; since X is not equal across years and the question table shows only four years, this is incorrect for X, and Y is not a perpetuity either. 
- Option b: Unequal cash flow; Annuity. This matches X as unequal and Y as an annuity, making this a correct pairing.
- Option c: Annuity; Unequal cash flow. This would imply X is an annuity (equal payments) and Y is unequal, which contradicts the observed data where X is increasing and Y is constant.
- Option d: Annuity; Equal cash flow. While Y is an equal cash flow, X is not an annuity due to its varying amounts, so this option incorrectly labels X as an annuity.

Putting it together, the only option that aligns with the cash-flow patterns shown in the table is that Investment X has unequal cash flows and Investment Y has an annuity-style, equal cash flow.

MCD2170 - T2 - 2025 Key Concept 1 Video quiz

Investment X is an example of a_ cash flow and Investment Y is an example of cash flow [table] Year | Investment X | Investment Y 1 | $5 000 | $5 000 2 | $7 000 | $5 000 3 | $9 000 | $5 000 4 | $11 000 | $5 000 [/table]

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