Question

Would you rather have $100,000 today or $1,000 a month for the rest of your life? Including screenshots of your use of the spreadsheet provided or your own versions of the formulas is strongly encouraged. Answering the question using only a common sense, or narrative approach will not get full credit. I need to see comprehension of the Time Value of Money concept through your answer of this question. Interest is 7%

Answer 1

The decision to have $100,000 today or $1,000 a month for the rest of your life is deduced by taking present value of both the options.The pillar of time value of money concept is that $ today will not be equals to $ tomorrow. The future cash flows are discounted at required rate of return to find present value.

In the first option we have $100000 today. PVF or PVAF for today ( ie; year 0) is 1. So the present value is also $100000.

In the second option we would receive $1000 per month for the rest of the life. The word " Rest of the life" indicates perpetuity. The present value for a perpetuity can be calculated as

Fixed periodic payment / interest rate or discount rate per period

Here the periodic payments are $1000 and  interest rate or discount rate per period is .5833% (7%/12)

Present value of perpetuity = 1000/.5833%

= $171428.57

The present value of periodic receipts exceeds the first option to have $100000 today. Hence it will be better for yout o go for second option.