Question

n Layout References Mailings Review View B. Barb has been offered money from her parents. Her parents will give her $35,000 at the end of the fifth year or either of the two other options. Assuming she can invest at an interest rate of 5% which of the three options will give her the most money five years from now? Show calculations for the value of each option 1. Receive $28,000 now (which she can invest for 5 years) 2. Receive S6,000 at the end of each year for 5 years, which she can invest as she receives each amount. 3. Receive the $35,000 at the end of year five as described above. Show your work and answers below: ords English (United Statesi Focus Top stories

Answer 1

Evaluation of three options

Option1- Receive $28,000 now

Interest rate = 5%

Time period = 5 years

CVF(_{5%, 5}) = Compound value factor at 5% for 5 years

Future value = Present value x CVF(_{5%, 5})

= 28,000 x 1.276

= $35,728

Option 2- $6,000 at the end of each year for 5 years

CVAF(_{5%, 5}) = Compound value annuity factor at 5% for 5 years

Future value = Annuity x CVAF(_{5%, 5})

= 6,000 x 5.526

= $33,156

Option 3- Receive $35,000 at the end of 5 years

Future value = $35,000

Conclusion- Since future value is highest in option 1, hence she must choose option 1 to get maximum money.

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks.