Question

Exercise 5-10 (Static) Future and present value [LO5-3, 5-7, 5-8]

Answer each of the following independent questions.

Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $64,000 cash immediately, (2) $20,000 cash immediately and a six-period annuity of $8,000 beginning one year from today, or (3) a six-period annuity of $13,000 beginning one year from today. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. Assuming an interest rate of 6%, determine the present value for the above options. Which option should Alex choose?
2. The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2030. Weimer will make annual deposits of $100,000 into a special bank account at the end of each of 10 years beginning December 31, 2021. Assuming that the bank account pays 7% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2030?

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Assuming an interest rate of 6%, determine the present value for the above options. Which option should Alex choose? (Round your final answers to nearest whole dollar amount.)

	Annuity Payment PV Annuity Immediate Cash PV Option Option 1 $0selected answer correct $0selected answer correct + = $0 Option 2 + = $0 Option 3 + = $0 Which option should Alex choose? Option 1selected answer correct

The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2030. Weimer will make annual deposits of $100,000 into a special bank account at the end of each of 10 years beginning December 31, 2021. Assuming that the bank account pays 7% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2030? (Round your final answers to nearest whole dollar amount.)

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	Table or calculator function: Payment: n = i = Future value:

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Answer 1

Answer 1

Alex should choose option 1 since the present value is the highest

Option 1
64,000
Option 2
		20,000
4.917324326	8,000	39,338.59
		59,339
Option 3
13,000	4.91732
63925.21624

Answer 2

future value	cash flow*[((1+R)^n-1)/R]
	100000*[((1+0.07)^10-1)/0.07]
	13,81,645

Future value = cash flow *  (1+R)^ⁿ- 1

R