Question

2. As part of a lawsuit settlement, a major corporation offers you $200,000 today or $207,000 next year. Which do you choose if annual interest rates are 4 percent? 3. What is the present value of the asset that has the following cash flow stream at an annual rate of 5% assuming annual compounding? Years: $250 $250 $250 $5,250

Answer 1

2. Settlement offer is

(a) $200,000

(b) $207,000 after one year

Interest = 4%

Which one you choose?

If we consider PW method of comparison

PW of first option = $200,000

PW of second option = $207,000 (1 + 0.04) ^{– 1} = $199,038.46

The better option is the first option of $200,000 receiving now.

3. Present Value of the following cash flow at interest rate of 5%

Year	0	1	2	3	4
Cash Flow		250	250	250	5,250

PV = 250 (P/A, 5%, 3) + 5,250 (P/F, 5%, 4)

PV = 250 (2.72325) + 5,250 (0.82270)

PV = 5,000