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?

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.

Quote:

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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?

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What's the answer

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.

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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