Your grandfather has offered you a choice of one of the three following alternat
ID: 2733077 • Letter: Y
Question
Your grandfather has offered you a choice of one of the three following alternatives: $12,500 now, $6,250 a year for seven years, or $81,000 at the end of seven years. Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. a-1. Assuming you could earn 11 percent annually, compute the present value of each alternative: a-2. Which alternative should you choose? $81,000 received at end of seven years $6,250 received each year for seven years $12,500 received now b-1. If you could earn 12 percent annually, compute the present value of each alternative: b-2. Which alternative should you choose? $81,000 received at end of seven years $6,250 received each year for seven years $12, 500 received nowExplanation / Answer
Answer a-1.
Present Value of Alternative 1 = 12,500
Present Value of Alternative 2 = 29,451.23 ( 6,250 * (1-(1/1.11)^7) / 0.11 )
Present Value of Alternative 3 = $39,014.33 (81,000 / 1.11^7)
Answer a-2.
Alternative 3 has higher present value than the others. So, Alternative 3 should be chosen.
Answer b-1.
Present Value of Alternative 1 = 12,500
Present Value of Alternative 2 = 28,523.48 ( 6,250 * (1-(1/1.12)^7) / 0.12 )
Present Value of Alternative 3 = $36,640.29 (81,000 / 1.12^7)
Answer b-2.
Alternative 3 has higher present value than the others. So, Alternative 3 should be chosen.
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