In: Accounting
Your rich aunt offers you the choice of 3 pay-outs today
Choice 1 : $1000 paid every year for 5 years, with the first payment to be received at the end of year 3
Choice 2 : $300 paid today
Choice 3 : $80 paid at the end of each month for 5 years, with the first payment to be received in a month
(a) What is the effective annual interest rate would make you indifferent between choice 2 and choice 3?
(b) If you were to receive the monthly payment of at the beginning of each month for 5 years, what monthly payment would make you indifferent to receiving $3000 today? Use a 10% p.a. interest rate.
(c) Calculate the PV of 3 choices and select the best choice among the 3 alternatives, use a 10% p.a. interest rate.