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Homework answers / question archive / Your grandfather has offered you a choice of one of the three following alternatives $7,000 now, $2,000 a year for ten years, or $32,000 at the end of ten years Use a Financial calculator to arrive at the answers
Your grandfather has offered you a choice of one of the three following alternatives $7,000 now, $2,000 a year for ten years, or $32,000 at the end of ten years Use a Financial calculator to arrive at the answers. Round the final answers to the nearest whole dollar.)
a-1. Assuming you could earn 8 percent annually, compute the present value for the following amounts
87,000 now 82,000 a year for ten years 032,000 at the end of ten years
Present value
a-2. Which alternative should you choose,
0 $32,000 received at the end of ten years 0 $2,000 received each year for ten years 0 $7,000 received now
b-1. If you could earn 11 percent annually, compute the present value for the following amounts
57,000 now 2,000 a year for ten years $32,000 at the end of ten years
Present value
I I
b-2. Which alternative should you choose?
0 $2,000 received each year for ten years 0 $32,000 received at the end of ten years 0 $7,000 received now
| a-1 | Assuming you could earn 8 percent annually compute the present value of each alternative: | ||||||||
| Present value today | $7,000 | ||||||||
| Year | Cash flow | Discount factor @ 8% | Present Value | ||||||
| 1 | $2,000 | 0.925926 | $1,851.85 | ||||||
| 2 | $2,000 | 0.857339 | $1,714.68 | ||||||
| 3 | $2,000 | 0.793832 | $1,587.66 | ||||||
| 4 | $2,000 | 0.73503 | $1,470.06 | ||||||
| 5 | $2,000 | 0.680583 | $1,361.17 | ||||||
| 6 | $2,000 | 0.63017 | $1,260.34 | ||||||
| 7 | $2,000 | 0.58349 | $1,166.98 | ||||||
| 8 | $2,000 | 0.540269 | $1,080.54 | ||||||
| 9 | $2,000 | 0.500249 | $1,000.50 | ||||||
| 10 | $2,000 | 0.463193 | $926.39 | ||||||
| $13,420.16 | |||||||||
| Present value if $ 2000 received for 10 years | $13,420.16 | ||||||||
| $32000*0.463193 | 14822.18 | ||||||||
| a-2 | Alternative 1 will be chosen since the present value today is $14,822.18 | ||||||||
| b-1 | Assuming you could earn 11 percent annually compute the present value of each alternative: | ||||||||
| Present value today | $7,000 | ||||||||
| Year | Cash flow | Discount factor @ 11% | Present Value | ||||||
| 1 | $2,000 | 0.9009009 | $1,801.80 | ||||||
| 2 | $2,000 | 0.81162243 | $1,623.24 | ||||||
| 3 | $2,000 | 0.73119138 | $1,462.38 | ||||||
| 4 | $2,000 | 0.65873097 | $1,317.46 | ||||||
| 5 | $2,000 | 0.59345133 | $1,186.90 | ||||||
| 6 | $2,000 | 0.53464084 | $1,069.28 | ||||||
| 7 | $2,000 | 0.48165841 | $963.32 | ||||||
| 8 | $2,000 | 0.4339265 | $867.85 | ||||||
| 9 | $2,000 | 0.39092477 | $781.85 | ||||||
| 10 | $2,000 | 0.35218448 | $704.37 | ||||||
| $11,778.46 | |||||||||
| Present value if $ 2000 received for 10 years | $11,778.46 | ||||||||
| $32000*0.35218448 | 11269.9033 | ||||||||
| b-2 | Alternative 2 will be chosen since the present value today is $11,778.46 | ||||||||
