Question

Please verify using a financial calculator [N, I/TR, PMT, PV, FV] values ans explain any discrepancies

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question: You have won the church spring raffle. You are presented with three price choices, and you must pick the best one. The discount rate if 8%. Choice 1 = $4,800 payment one year from now; Choice 2 = 5 payments of $1,200 starting at the end of this year; Choice 3 = $1,000 payment today and $4,500 at the end of year 4.

option 1: no calculation required bexause they are telling you how much you are to receive >>> $4800

option 2: Best choice: $7039.92

N=5

I/YR=8

PMT=1200

PV=n/a

FV=7039.92

option 3: no calculation required because you are told how much you are going to receive >>> $ 1000 + $4500 = $5500

Answer 1

Question has provided three price Choices and Analyzing 3 options to pick the best one.

Since, in different choices payments are received in different periods. To analyse and choose the best option we will calculate the Present Value of all three choices.

Option 1:- Payment to be received 1 year from now

Discount rate= 8%

Present Value=

= $ 4444.44

Option 2 : 5 payments of $1,200 starting at the end of this year

Year-end	Amount	PVF @ 8%	Present value
1	1200	0.926	1111.2
2	1200	0.857	1028.4
3	1200	0.794	952.8
4	1200	0.735	882
5	1200	0.680	816
PRESENT VALUE			$ 4790.4

Option 3: $1,000 payment today and $4,500 at the end of year 4

Present Value=

= $ 4308

Since, choice 2 has the highest present value, it is the best choice.

Note- The mistake you are committing is you are adding interest in the amounts to be received in future(Option -2), rather it has asked to compute the present value of payments to be received in future.