Is it more profitable to receive a lump sum of $19,000 at the end of 5 years or

Question

Is it more profitable to receive a lump sum of $19,000 at the end of 5 years or to receive $950 at the end of each quarter-year for 5 years? Assume that the money can earn 2.3% interest compounded quarterly. Choose the correct answer below. A. It is more profitable to receive $950 each quarter for 5 years, because the future value of receiving a lump sum of 519,000 at the end of 5 years is higher than the future value of receiving $950 each quarter for 5 years. B. It is more profitable to receive $950 each quarter for 5 years, because the future value of receiving $950 each quarter for 5 years is higher than the future value of receiving a lump sum of 519,000 at the end of 5 years. C. It is more profitable to receive a lump sum of 519,000 at the end of 5 years, because the future value of receiving a lump sum of $19,000 at the end of 5 years is higher than the future value of receiving $950 each quarter for 5 years. D. It is more profitable to receive a lump sum of 519,000 at the end of 5 years, because the future value of receiving $950 each quarter for 5 years is higher than the future value of receiving a lump sum of $19,000 at the end of 5 years.

Explanation / Answer

The option will be (c), as the money is compounded quarterly so the more we keep the more we can earn but if we take $950 at each quarter for 5 years obviously the amount of money on which interest is compounded will go on decreasing which yeald less profit.

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