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1. Congratulations. You have just won a sweepstakes prize. The prize allows you to choose the...

1. Congratulations. You have just won a sweepstakes prize. The prize allows you to choose the method of payment. Prize A: Receive $10000 today. Prize B: Receive $1000 today, followed by the amount of $1000 received at the end of each year for the next 15 years beginning one year from today. Which alternative you will choose at the interest rate stays at 8%? a. Prize A b. Prize B

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Answer #1

We will calculate the present value of earnings if we choose Prize B

Present value = 1000+ [ 1000*PVIFA,8%,15]

=1000 + [ 1000*8.559478]

=1000+ 8559.48

=9559.48

Since the Prize A give 10,000 today,Prize A must choose.

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is Discount rate and “n” is the useful life of investment

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