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5.com/owa/?realm-frederick.edu&path-/mail/inbox Outlook lew lv Delete Archive Junk!' Sweep Move to Catego 13kD w time value of m av esign Layout References Mailings Review View IB Time Value of Money Calculations A. Mike won the lottery and has the following options for his winnings: 1. S100,000 at the beginning of the year (today) 2. A lump sum payment of S160,000 at the end of the ninth year 3. S13,000 at the end of each year for 8 years He can invest his winnings at an annual rate of return of496. Which option is best? Show your calculations for each option. Hint - use present value techniques where applicable to make the options comparable. Show your work and answers below: B. Barb has been offered money from her parents. Her parents will give her $35,000 at the end of the fifth year or either of the two other options. Assuming she can invest at an interest rate of 5% which of the three options will give her the most money five years

Explanation / Answer

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. Discount/Investment rate 4% PV Calculation A B A*B 0 1 Option 1 Period Amount PV factor Present Value 1 0.961538 Option 1 0 100000 1 100000 2 0.924556 Option 2 9 160000 0.7026 112414 3 0.888996 Option 3 1-8 13000 6.732745 87526 4 0.854804 5 0.821927 Option 2 is best as this is giving Highest Present Value. 6 0.790315 7 0.759918 8 0.73069 9 0.702587 Option 2 6.732745 Option 3 Discount/Investment rate 5% PV Calculation A B A*B 0 1 Option 1 Period Amount PV factor Present Value 1 0.952381 Option 1 0 28000 1 28000 2 0.907029 Option 2 5 35000 0.7835 27423 3 0.863838 Option 3 1-5 6000 4.3295 25977 4 0.822702 5 0.783526 Option 2 Option 1 is best as this is giving Highest Present Value. 4.329477 Option 3

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