Question

Please show your work in deriving answers to the following questions. When answering, assume you are trying to maximize the present value of benefits minus any costs that may exist. In part I. assume that all payments and receipts are at the end of the year or period, unless otherwise stated. Also, round to the nearest cent in calculating your answers. PART I (18 points) 1. Analyze the following scenarios and decide, whether you would prefer (1) or (ii) at an interest rate of 7%. a) Would you prefer to make a payment of i) $800 due in ten years, or it) $35 a year for the next 30 years (3 points) b) Would you prefer to receive i) $1000 now or ii) $80 a year forever, starting in 5 years (3 points) $90 2. Consider the following income streams and answer questions a) and b): Year Stream 1 Stream 2 Stream 3 $150 $700 $600 $150 $150 $0 $80 $150 $70 $150 $60 $150 $0 $60 $150 $70 $150 $150 $80 $150 $150 $90 $150 $150 $100 $150 a) At a discount rate of 5%, calculate the value of each stream and decide which you would prefer to receive. (6 points) b) At a discount rate of 10%, calculate the value of each stream and decide which you would prefer to receive. (6 points)

Answer 1