Question

Your parents have made you two offers. The first offer includes annual gifts of $5,000, $6,000, and $8,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 6.2 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

Answer 1

Answer: $16,707

Explanation:

Given the given discount rate of 6.2%, the minimum amount that we shall accept today is the Present Value of the annual cashflows,

PV = $\frac{5000}{1.062}$ + $\frac{6000}{(1.062)^{2} }$ + $\frac{8000}{(1.062)^{3} }$ = $16,707