If you require a 11% annual return on your investments, would you prefer $25,250 seven (7)...
If you require a 11% annual return on your investments, would you prefer $25,250 seven (7) years from today or an ordinary annuity of $2,525 per year for 10 years?
Homework Answers
Option A:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=$25250/1.11^7
=$25250*0.48165841
=$12161.87(Approx).
Option B:
Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$2525[1-(1.11)^-10]/0.11
=$2525*5.889232011
=$14870.31(Approx).
Hence ordinary annuity of $2525 per year for 10 years is better having higher present value.
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