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Following significant losses at a casino, a high roller is offered the following payment alternatives
Following significant losses at a casino, a high roller is offered the following payment alternatives. Assuming an interest rate of 10% p.a., which alternative should the high roller choose? $23,000 at the end of next year with the cash flow growing at 8% p.a. until the end of year 5. O $27,000 per annum at the end of each year for the next 5 years. $60,000 at the end of year 2 and $90,000 at the end of year 5. $160.000 at the end of year 5.
Expert Solution
Formulas Used;-
| Interest rate | 0.1 |
| Tenure | 5 |
| Annual flow | 23000 |
| Growth rate | 0.08 |
| Present Value | =PV((1+B1)/(1+B5)-1,B2,-B4) |
| Annul Flow | 27000 |
| Present Value | =PV(B1,B2,-B8) |
| at the end of 2 year | 60000 |
| at the end of 5 year | 90000 |
| Present Value | =B11/(1+B1)^2+B12/(1+B1)^B2 |
| 160000 at 5th year | 160000 |
| Present Value | =B15/(1+B1)^B2 |
So, According to above Table the First Option Provides highest present value of cashflow so, High roller should choose $23000 at the end of next year with the cashflow growing at 8% p.a. untill the end of 5 years.
please see the attached file to get fuul answer.
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