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Homework answers / question archive / EXERCISE 6: PRESENT VALUES AND FUTURE VALUES Suppose you were offered the following options: a 10-year annuity of $10,000 at the end of each year or a $60,000 lump-sum payment today

EXERCISE 6: PRESENT VALUES AND FUTURE VALUES Suppose you were offered the following options: a 10-year annuity of $10,000 at the end of each year or a $60,000 lump-sum payment today

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EXERCISE 6: PRESENT VALUES AND FUTURE VALUES Suppose you were offered the following options: a 10-year annuity of $10,000 at the end of each year or a $60,000 lump-sum payment today. If you want to make 10%, which option would you prefer? To answer this question, calculate the present value of both options and the future value of both options.

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Present value of option one Interest rare = 10% Amount at the end of each year = $10,000 Number of year E 10 PVAF(10%,10) = 6.759 Present value of $10,000 each = $10000 * 6.759 year for 10 years = $67,590 PVAF = present value Annuity factor for 10years at the rate of 10% Option two is lumpsum $60,000 today. Conclusion: From above it is clear that receiving $10000 each year for 10 years is more than receving $60000 in current year.

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