In: Accounting
you have won the lottery, and you have 2 options: Option1: $450,000 cash upfront
opetion2: :$200,000 cash upfront plus payment of $20,000 every quarter for the next 5 years. assume that you can invest at 12% per year, comp quarterly..
How much is the present value of option 2?
Annual Rate of interest = 12% | ||||
Quarterly interest rate = 12 % /4 = 3 % | ||||
Solution: | ||||
CACLULATION OF THE PRESENT VALUE OF THE OPTION 2 | ||||
Quarters | Cash Inflow (Outflow) | PVF of $ 1 @ 3% | Present Value (A XB) | |
0 | $ 200,000 | 1.00000 | $ 200,000 | |
1 | $ 20,000 | 0.97087 | $ 19,417 | |
2 | $ 20,000 | 0.94260 | $ 18,852 | |
3 | $ 20,000 | 0.91514 | $ 18,303 | |
4 | $ 20,000 | 0.88849 | $ 17,770 | |
5 | $ 20,000 | 0.86261 | $ 17,252 | |
6 | $ 20,000 | 0.83748 | $ 16,750 | |
7 | $ 20,000 | 0.81309 | $ 16,262 | |
8 | $ 20,000 | 0.78941 | $ 15,788 | |
9 | $ 20,000 | 0.76642 | $ 15,328 | |
10 | $ 20,000 | 0.74409 | $ 14,882 | |
11 | $ 20,000 | 0.72242 | $ 14,448 | |
12 | $ 20,000 | 0.70138 | $ 14,028 | |
13 | $ 20,000 | 0.68095 | $ 13,619 | |
14 | $ 20,000 | 0.66112 | $ 13,222 | |
15 | $ 20,000 | 0.64186 | $ 12,837 | |
16 | $ 20,000 | 0.62317 | $ 12,463 | |
17 | $ 20,000 | 0.60502 | $ 12,100 | |
18 | $ 20,000 | 0.58739 | $ 11,748 | |
19 | $ 20,000 | 0.57029 | $ 11,406 | |
20 | $ 20,000 | 0.55368 | $ 11,074 | |
Total Present Value | $ 497,549 | |||
Answer = Present value of the option 2 = $ 497,549 | ||||