Question

Use what you have learned about the time value of money to analyze each of the following decisions: Decision #1: Which set of Cash Flows is worth more now? Assume that your grandmother wants to give you generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive: Option A: Receive a one-time gift of $ 10,000 today. Option B: Receive a $1500 gift each year for the next 10 years. The first $1400 would be received 1 year from today. Option C: Receive a one-time gift of $18,000 10 years from today.

Answer 1

Answer:

The best option is Option A.

Explanation:

Giving the following information:

Option A: Receive a one-time gift of $ 10,000 today. Option B: Receive a $1500 gift each year for the next 10 years. The first $1500 would be received 1 year from today. Option C: Receive a one-time gift of $18,000 10 years from today.

We need to find the present value of each option. We will use the following formula:

PV= FV/(1+i)^n

We will assume an interest of 10%.

Option A:

PV= 10,000

Option B:

First, we find the final value:

FV= {A*[(1+i)^n-1]}/i

A= annual deposit

FV= {1,500*[(1.10^10)-1]}/0.10

FV= 23,906.14

PV= 23,906.14/1.10^10= $9,216.85

Option C:

PV= 18,000/1.10^10= $6,939.80