Question

Time Value Of Money

Show the details of your calculations. Type your answers and supporting calculations on the sheet, and attach this in Blackboard on or before the due date. Time Value of Money Calculations A. Mike won the lottery and has the following options for his winnings: A1. $100,000 at the beginning of the year (today) A2. A lump sum payment of $160,000 at the end of the ninth year A3. $13,000 at the end of each year for 8 years Best choice He can invest his winnings at an annual rate of return of 4%. Which option is best? Show your calculations for each option. Hint - use present value techniques where applicable to make the options comparable. B. Barb has been offered money from her parents. Her parents will give her $35,000 at the end of the fifth year or either of the two other options. Assuming she can invest at an interest rate of 5% which of the three options will give her the most money five years from now? Show calculations for the value of each option. B1. Receive $28,000 now (which she can invest for 5 years) B2. Receive $6,000 at the end of each year for 5 years, which she can invest as she receives each amount. B3. Receive the $35,000 at the end of year five as described above. Best choice

Answer 1

Part A

Option 2 is best

Present value of option 1 = $100000

Present value of option 2 = 160000*(1/(1.04^9)) = $112414

Present value of option 3 =13000*((1-(1.04^-8))/4%) = $87526

Part B

Option 1 will give her the most money

Option 1 = 28000*(1.05^5) = 35736

Option 2 =(6000*1.05^4)+ (6000*1.05^3)+ (6000*1.05^2)+ (6000*1.05^1)+ (6000*1.05^0) = $33154

Option 3 = $35000