A financial fairy godmother wants you to be financially independent. She offers

ID: 2615036 • Letter: A

Question

A financial fairy godmother wants you to be financially independent. She offers you a choice out ...

A financial fairy godmother wants you to be financially independent. She offers you a choice out of 5 financial alternative products, being:

1. An amount of € 7 million today.

2. An amount of € 650.000 yearly, forever.

3. Three amounts of € 3.300.000, the 1st after 2 years, the 2nd after 4 years and the last after 6 years.

4. A yearly amount of € 1.600.000, 6 years in a row, the 1st after 1 year from now.

5. A yearly amount of € 1.400.000, 6 years in a row, the 1st today, the 2nd 1 year from now and so on.

Your required rate of return is 10%.

Taking into account the time value of money, please answer the following questions:

What is the present value of alternative (5)?

Present value of annuitydue =(1+interest rate)Annuity[1-(1+interest rate)^-time period]/rate

=1.1*1,400,000[1-(1.1)^-6]/0.1

=$1,400,000*4.790786769

which is equal to

=$6707101.48(Approx).

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