Question

Marilyn’s parents have agreed to help her purchase a new car upon graduation in four years. They have given her two choices. The first choice is that they will give her $3,630 each year for the next four years for her to invest herself. The second choice is that they will wait four years and give her $16,180. Marilyn can invest the money at a 3% rate.

If Marilyn can invest the money at 8%, which options should she choose? (Round present value factor calculations to 4 decimal places, e.g. 1.2512 and final answers to 0 decimal places e.g. 58,971.)

Option 1

Option 2

Present value$ $

Marilyn should take                                                                       option 1option 2.

Answer 1

We will find future Value of annuity at given rates if it is greater than 16180 then we should take that option

Periodic payment is 3630 tenure is 4 years

Option 1) 3% rate

Future value is 3630(FVIFA 3% 4y)

= 3630(4.1816) = 15186

So she should choose to take 16180 after 4 years of she could invest at 3%

Option 2)

Future value at 8%

=3630(FVIFA 8% 4y)

3630(4.5061) = 16357

As future value is more than lumpsum payment she should take annuity payments if she can earn 8%