Question

please show working not just the calculator keys.

You recently filed a successful lawsuit against a company. Today, you received three settlement options as follows: Option A:$10,000 on the last day of each year for 25 years Option B: $880 on the last day of each month for 25 years Option C: $119,830 as a lump sum payment today You can earn 8 percent on your investments. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the next 25 years. Which option is the best? Show your work to demonstrate your answer i.e. show either the formulas for your work and all calculations, or, if you are using a financial calculator list the values for N, i, Pymt, FV, PV.

Answer 1

OPTION-A OPTION-B OPTION-C 0.6667% Periodic Interest rate, RATE 8% 8% #of periods of deposit, NPER Priodic payments, PMT Lumsum payment today, PV Cash flow or Interest compounding type, TYPE Future Value 25 300 25 $10,000 $880 $0 $0 $119,830 0 0 if compounded at the end of each year; 1 if compounded at the beginning of each year 0 $731,059.40 $820,652.78 [Ref: NOTE] $836,903.23 DECISION: As OPTION-B yields the highest future value among the three options, it is beneficial to accept OPTION-B. NOTE For OPTION-A: Future value is calculated using EXCEL FUNCTION FV(rate,nper,pmt,pv,type) where rate-8%; nper 25; pmt-- 10000; pv-0; type-0; Here, value for pmt is negative as it denotes cash inflows; type-0 as payments are received at the end of each period only. For OPTION-B: Future value is calculated using EXCEL FUNCTION FV(rate,nper, pmt, pv,type) where rate-0.667%; nper= 300; pmt--880; pv-0; type-0; Here, value for pmt is negative as it denotes cash inflows; type=0 as payments are received at the end of each period only. For OPTION-C: Future value is calculated using EXCEL FUNCTION FV(rate, nper,pmt, pv,type) where rate-8%; nper = 25; pmt-0; pv-119830; type-0; Here, value for pv is negative as denotes cash inflows; type 0 as interest is compounded at the end of each period only.

EXCEL SCREENSHOT FOR EASY UNDERSTANDING: F D 1 OPTION-A OPTION-B OPTION-C 2 Periodic Interest rate, RATE 3of periods of deposit, NPER 4 Priodic payments, PMT 5 Lumsum payment today, PV 6 Cash flow or Interest compounding type, TYPE 7 Future Value - 8 % / 12 -25 12 $880 89% 8% 25 25 $0 $10,000 SC $119,830 00if compounded at the end of each year; 1 if compounded at the beginning of each year 0 C -FV(B2,B3, -B4,-B5,86) -FV(C2,C3, -C4,-C5,C6) FV(D2,D3,-D4,-DS,D6) [ Ref: NOTE]