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

Business Dec 24, 2022

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.

Expert Solution

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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