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Homework answers / question archive / 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

Finance

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.

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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.

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