Suppose you have an uncle who wishes to make a gift of cash to you which will to

Question

Suppose you have an uncle who wishes to make a gift of cash to you which will total $1,000,000. Your uncle has asked you to tell him if you would rather have $1,000,000 in 5 years from today or if you would rather have $200,000 at the beginning of each of the next 5 years beginning with January 1, 2014. You have just completed your study of the time value of money and want to apply that concept to this decision. How would you calculate the value of each of possible gift amounts? What will you tell your uncle is your choice from these two alternatives?

Explanation / Answer

Answer Alternative 1 Present Value of 1000000, which receive after Five years Assume risk free interest rate is 5% Amount PVIF 5%, 5 Present value of gift 1000000 0.784 784000 Alternative 2 Amount PVIFA 5%, 4 Present value of gift 200000 3.546 709200 Add cash received in beginning of Ist year 200000 Total value of gift 909200 I ask uncle that I ;ike alternative 2

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