Question

Your grandfather would like to share some of his fortune with you. He offers to give you money under one of the following scenarios you get to choose 1. SB 000 per year at the end of each of the next eight years 2. $50,050 Dumo sum) Now 3.599,350 (lump sum) eight years from now (Click the icon to view Present Value of $1 table.) Click the icon to view Present Value of Ordinary Annuity of $1 table) Read the requirements Scenario 1: Scenario 2 Scenario 3: appears to be the best option. Based on a 6% interest rate its present value is the Requirement 2. Would your preference change if you used a 12% discount rate? Compute the present value of each scenario using a 12% discount rate. Round the factors to three decimal places, Xxxx Round the present value to the nearest whole dar) Present Value Scenano 1: Scenano 2: Scenario 3 pears to be the best option med on a 12 terest rate its present value is the

Answer 1

The option with highest present value will be preferred

Scenario 1 = 8000*PVAF(6%, 8 years)

= 8000*6.210

= $49,680

Scenario 2 = $50,050

Scenario 3 = 99,350*PVF(6%, 8 years)

= 99,350*0.627

= $62,292.45

Scenario 3 is the best option

Present value = $62,292.45

At 12%

Scenario 1 = 8000*4.968 = $39,744

Scenario 2 = $50,050

Scenario 3 = 99,350*0.404

= $40,137.4

Scenario 2 is best

Present value = $50,050