Respuesta :
Answer:
I would choose to receive $1 million for 13 years because the present value of the cash flows is greater than 10 million
Explanation:
To determine which option i would choose, i have to calculate the present value of the second option
Present value is the sum of discounted cash flows
Present value can be calculated using a financial calculator
Cash flow each year from year 1 to 13 = $1 million
I = 3%
Present value = $10,634,955
I would choose to receive $1 million for 13 years because the present value of the cash flows is greater than 10 million - $10,634,955 > $10,000,000
To find the PV using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
Option 2 should be considered since it contains more amount of present value as compared to option 1.
Calculation of the present value:
In option 1, it offered $10 million or $10,000,000
While in option 2, the interest rate is 3% and the time period is 13 years Also, the payment is $1 million
So here we need to determine the present value
PV = PMT x (1 - (1+i)-n / i )
PV = 1,000,000 x (1 - (1+0.03)-13 / 0.03 )
PV = 10,634,955.33
Based on this, the option 2 should be considered.
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