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New Member
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Mar 10, 2007, 09:24 PM
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Alternative present value
Your rich godfather has offered you a choice of one of the three following alternatives: $10,000 now $2,000 a year for eight years or $24,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative?
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Junior Member
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May 20, 2007, 07:57 AM
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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.
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New Member
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Jun 12, 2007, 09:16 AM
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Originally Posted by jlb83571
Your rich godfather has offered you a choice of one of the three following alternatives: $10,000 now $2,000 a year for eight years or $24,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative?
What's the answer
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Junior Member
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Jun 12, 2007, 09:50 AM
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Option 1: 10,000 now
Option 2: 2,000 a year for 8 years
Present value of future cash flows = 2000 * 4.968(PV factor of an annuity for 8 years @ 12%)
= $9,936
Option 3: 24,000 at the end of 8 years
Present value of cah flow = 24,000 * 0.404 (Pv factor of a cash flow for 8 years @ 12 %)
= $9,696
Option 1 is better as the value of cash flows is greater than the other 2 options.
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New Member
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Apr 7, 2008, 08:21 AM
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Determine the amount of money in a savings account at the end of five years,
Given an initial deposit of $5,000 and a 12 percent annual interest rate when
Interest is compounded (a) annually, (b) semiannually, and (c) quarterly.
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