1. You are negotiating for the terms of a legal settlement, and your opponent’s

Question

1. You are negotiating for the terms of a legal settlement, and your opponent’s attorney has presented you with the following alternative settlement alternatives:

a. $38,000 today in one lump sum.

b. $50,000 to be paid to you in five equal payments of $10,000 at the end of each of the next five years.

c. Five equal annual installments of $9,100 each, beginning today.

If your discount rate is 10%, what is the present value of each of the alternatives and which alternative would you choose?

2. If you deposit $100 in the bank today at an annual rate of 5.5% compounded annually, how long will it take to double In value?

3. Your Aunt Matilda Mae makes you the following offer: $15,000 upon undergraduate graduation in one year or $18,000 upon MBA graduation in 3 years. Which offer should you take if current rates are 14%?

Explanation / Answer

2.

the value will be doubled in 1 year 9 months

3

so, by observing the both offers PV second offer is better than the 1st one

1. Calcultion of present value pv(rate,nper,pmt) PMT 38000 Rate 10% N 1 PV Rs. 34,545.45 b. FV 50000 PMT 10000 Rate 10% N 5 Present value Rs. 68,953.93 c PMT 9100 Rate 10% N 1 Present value Rs. 8,272.73

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