Question

You won a raffle while you were down the shore with friends. For your prize, you can choose among the following three alternatives. If you believe that an 6% return is the appropriate discount rate to use, what is the present value of each alternative? Which should you prefer?

a)$15,000 six years from today
b)$10,000 today
c)$4,000 today plus four annual payments of $2,000, the first of which would occur one year from today

Answer 1

You should prefer alternative C.)

Step-by-step explanation:

a.)

FV = 15,000

N = 6

I/Y =6%

PMT = 0

then CPT PV = $10,574.41

b.)

PV of $10,000 today is just = $10,000

c.)

FV = 0

N = 4

I/Y =6%

PMT = 2,000

then CPT PV = $6,930.21

Add the $4,000 received today; $4,000 + $6,930.21 = $10,930.21

Therefore, you should prefer alternative C.)