Question

 Exercise 5-10 (Algo) Future and present value [LO5-3, 5-7, 5-8]

 Answer each of the following independent questions.

 Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $68,000 cash immediately, (2) $23,000 cash immediately and a six-period annuity of $7,900 beginning one year from today, or (3) a six-period annuity of $13,700 beginning one year from today. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 1. Assuming an interest rate of 6%, determine the present value for the above options. Which option should Alex choose?

 2. The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2030. Weimer will make annual deposits of $125,000 into a special bank account at the end of each of 10 years beginning December 31, 2021. Assuming that the bank account pays 7% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2030?

Answer 1

1. The question can be solved in the following manner:

Option 1 should be chosen since it gives the highest PV

Immediate Cash + (Annuity Payment*PV of Annuity) From PV Annuity Table @ 6% for 6 years Given Given Immediate Cash Annuity Payment PV of Annuity PV Option Option 1 Option 2 Option 3 68,000.00 23,000.00 68,000.00 61,846.83 7,900.00 4.91732 4.91732 13,700.00 67,367.28

2.

No. of years = 10 years

Interest Rate per year = 7%

Installment amount = $125000

Fund balance at Dec 31 2030 (using spreadsheet)

PV
R	7%
N	10
PMT	$      1,25,000.00
FV	$    17,27,056.00

Fund balance at Dec 31 2030 (using FV Annuity table)

= 125000*13.81645 = 1727056.25

Working for question 2

436 PV 0.07 437 R 438 N 10 439 PMT 125000 =FV(G437,G438,-G439,G436) 440 FV

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