Alternatives when accepting money

cnichols33 · #1 May 19, 2007, 08:27 PM

What if three alternatives where offered, which one would you accept? Assuming you could earn 11% annually..

1. 10,000 now

2. 2,000 a year for eight years

3. 24,000 at the end of eight years

Would your answer change if you could receive 12% annually? Why? Or why not?

bunnyKutty · May 19, 2007, 08:53 PM

Option 1: 10,000 now

Option 2: 2,000 a year for 8 years
Present value of future cash flows = 2000 * 5.146 (PV factor of an annuity for 8 years @ 11%)
= $10,292

Option 3: 24,000 at the end of 8 years
Present value of cah flow = 24,000 * 0.434 (Pv factor of a cash flow for 8 years @ 11 %)
= $10,416

Option 3 is better as the val;ue of cash flows is greater than the other 2 options.

Now try with 12 % PV factors and see what the answer would be.



At Ask Me Help Desk you can ask questions in any topic and have them answered for free by our experts. To ask questions or participate in answering them you must register for a free account. By registering you will be able to: Get free answers from experts in any of our 300+ topics. Accept money for answers that you provide. Communicate privately with other members (PM). See fewer ads. Sign Up!