0 You have a choice of $52 received today or three (3) payments of $20 each. The

Question

0 You have a choice of $52 received today or three (3) payments of $20 each. The first payment (of the three payments) will be received exactly one (1) year from today, the second will be received exactly two (2) years from today and the third will be received exactly three (3) years from today. Assume that you can always earn 6% per year. Required: The present value of the $52 received today alternative is $ . The present value of the three payment alternative is $ The approximate rate of return earned if the three payment alternative is chosen is between % and

Explanation / Answer

1. Since receiving $54 today , its not required to calculate its Present value.

The Present Value of $54 toady is $54 only

2. Receiving $20 at end end of year1 , 2 and 3 PV of all these cashflows are given PV of Annuity

Using BA II plus Calculator

20 PMT, 6 I/y, 3 N CPT PV

PV= $53.46

The PV of receiving three payment is $53.46

3. Taking - 52PV 20 PMT, 3N, CPT I/Y

I/Y= 7.51%

Therefore approx rate of return shoud be between 6% and 7.51%

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