Question

Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $68,000 cash immediately, (2) $23,000 cash immediately and a six-period annuity of $7,900 beginning one year from today, or (3) a six-period annuity of $13,700 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.)

Assuming an interest rate of 6%, determine the present value for the above options. Which option should Alex choose?

Answer 1

The present value of the first option is $68,000

Present value of the second option = $61,846.86

Present value of the third option = $67,367.34

Alex should choose the first option because it yields the highest cashflow

Step-by-step explanation:

Present value is the sum of discounted cash flows.

Present value can be calculated using a financial calculator:

The present value of the first option is $68,000

For the second option

Cash floe in year 0 = 23,000

Cash flow each year from year 1 to 6 = 7,900

I = 6%

Present value = $61,846.86

For the 3rd option,

Cash flow each year from year one to six = 13,700

I = 6%

Present value = $67,367.34

Alex should choose the first option because it yields the highest cashflow

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you