[cnichols33]

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]

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.