Question

7:

A) Your TA wants to give you some money, but they also want to test your comprehension of the material covered in ACCT 200. Thus, they have provided you with the following three options to receive the funds. Assume a 4% interest rate and choose the best option or receive nothing!

Option 1: $3,000,000 today

Option 2: $500,000 at the end of each year for 6 years

Option 3: $1,000,000 today; $1,500,000 at the end of 3 years; and $500,000 at the end of the 6th year

B) Joshua had an offer from Chick-fil-A that would allow him to eat all the chicken sandwiches he can eat five times a week for two years (so he doesn’t need to learn how to cook!). The price Chick-fil-A is planning to charge him is $35 per month for 2 years. The interest rate is 12%. What is the present value of this food extravaganza?

Answer 1

Answer to Question 7A This question is solved by comparing the present value figures of all the 3 options. The highest PV among the 3 options is chosen. Option 1 Present Value (given) $ 3,000,000 Option 2 Year 1-6 Amount $ 500,000 PVAF 5.24214 Discounted Amount $ 2,621,070 (500000*5.24214) Option 3 Year 0 3 6 Amount $ 1,000,000 $ 1,500,000 $ 500,000 PVAF 1.00000 0.88900 0.79031 Discounted Amount $ 1,000,000 $ 1,333,500 $ 395,155 $ 2,728,655 Conclusion Option 1 has the highest PV. Hence, the best option is Option 1. Answer to Question 7B Monthly charge Interest rate per month (12%/12) Term (in months) (2*12) PV of Ordinary Annuity (i=1%, n=24) From PVA table Present Value of monthly payment: (35*21.24339) 35 1% 24 21.24339 743.52 $