Calculate the present value of each scenario using a 6% discount rate. Which scenario

S12A-13 Determining present value

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

1. $8,750 per year at the end of each of the next six years

2. $49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

Solutions

Expert Solution

Step 1: Definition of present value

The value of the invested sum at present as compared to the future value is known as the present value. The present value tells us about the value of the money in the present with respect to the investment.

Step 2: calculation of present value

Step 3:

No, the preference cannot be changed because in 12% present value is not high as compare to 6%.

Sahil Dangi answered 1 year ago

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