In: Finance

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 $1500 would be received 1 year from today.

Option C: Receive a one-time gift of $18,000 10 years from today. Compute the Present Value of each of these options if you expect the interest rate to be 3% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth ______today.

Option B would be worth $__________ today.

Option C would be worth $__________ today.

Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect the interest rate to be 6% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________ today.

Option C would be worth $__________ today.

Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect to be able to earn 9% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________ today.

Option C would be worth $__________ today.

Financial theory supports choosing Option _______

Please show how this is done on Excel if possible, Thanks!

If discount rate is 3% | ||||||

Option A | present worth of Option A | future value/(1+r)^n | 10000/(1+3%)^0 | 10000 | ||

Option B | present worth of Option B | Annuity payment*PVAF at 3% for 10 Years | 1500*8.5300 | 12795 | 0.74409391 | |

PVAF at 3% for 10 Years | 1-(1+r)^n -1 /r | 1-(1.03)^-10/ 3% | .25590/3% | 8.5300 | 0.25590609 | |

option 3 | Present value of cash flow | fv/(1+r)^n | 18000/(1.03^10 | 13393.69 | 8.53020284 | |

I will choose option 3 as it results in highest present value | ||||||

if discount rate is 6% | ||||||

Option A | present worth of Option A | future value/(1+r)^n | 10000/(1+6%)^0 | 10000 | ||

Option B | present worth of Option B | Annuity payment*PVAF at 6% for 10 Years | 1500*7.36 | 11040 | 0.55839478 | |

PVAF at 6% for 10 Years | 1-(1+r)^n -1 /r | 1-(1.06)^-10/ 6% | .44160/6% | 7.36 | 0.44160522 | |

option 3 | Present value of cash flow | fv/(1+r)^n | 18000/(1.06)^10 | 10051.11 | 7.36008705 | |

I will choose option 2 as it results in highest present value | ||||||

if discount rate is 9% | ||||||

Option A | present worth of Option A | future value/(1+r)^n | 10000/(1+9%)^0 | 10000 | 0.42241081 | |

Option B | present worth of Option B | Annuity payment*PVAF at 9% for 10 Years | 1500*6.4166 | 9624.9 | 0.57758919 | |

PVAF at 9% for 10 Years | 1-(1+r)^n -1 /r | 1-(1.09)^-10/ 9% | .5775/9% | 6.41666667 | 6.4176577 | |

option 3 | Present value of cash flow | fv/(1+r)^n | 18000/(1.09)^10 | 7603.39452 | ||

I will choose option 1 as it results in highest present value |

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 $1400 gift
each year for the next 10 years. The first $1400 would
be
received 1 year from today.
Option C: Receive a...

Decision #1: Which set of Cash Flows is worth more
now?
Assume that your grandmother wants to give you a
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 $1400 gift each year for the next 10
years. The first $1400 would be received 1 year
from today.
Option C: Receive a one-time...

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 $ 7500 today.
Option B: Receive a $1000 gift each year for the next 10 years.
The first $1000 would be received 1 year from today.
Option C: Receive a one-time gift of...

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 $1400 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...

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 $1400 gift
each year for the next 10 years. The first $1400 would
be
received 1 year from today.
Option C: Receive a...

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 $1600 gift
each year for the next 10 years. The first $1600 would
be
received 1 year from today.
Option C: Receive a one-time...

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 $1600 gift
each year for the next 10 years. The first $1600 would
be
received 1 year from today.
Option C: Receive a one-time...

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 $ 7500 today.
Option B: Receive a $1000 gift
each year for the next 10 years. The first $1000 would
be
received 1 year from today.
Option C: Receive a...

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 $1500 would
be
received 1 year from today.
Option C: Receive a...

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 $1500 would
be
received 1 year from today.
Option C: Receive a one-time...

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