Bill Martin made an investment several years ago, and he now has an option as to
ID: 430036 • Letter: B
Question
Bill Martin made an investment several years ago, and he now has an option as to how it will take the return on that investment. Option 1 is to receive an immediate cash payment of $100,000. Option 2 is to receive a payment of $10,000 per year for the next 10 years and then to receive a final payment of $100,000 in the eleventh year. Option 3 is to receive a payment of $20,000 per year for the next 10 years. Bill desires a rate of return on this investment of at least 8%. Which option will return the most to Bill?
Can you help me solve with a detailed formula? Thanks
Explanation / Answer
Option 1 = its value is 100,000 now.
option 2: here i am assuming that the payments are being received at the end of every year. Present value = amount received/(1+8%)^time
Thus the current value of option 2 is 109,989
Option 3: here again i am assuming that payments are being received at the end of the year.
current value = 134,202
As the present or current value is highest in option 3, Bill should opt for it.
Year Cash flow Discount rate PV 1 10,000 1.08 9,259 2 10,000 8,573 3 10,000 7,938 4 10,000 7,350 5 10,000 6,806 6 10,000 6,302 7 10,000 5,835 8 10,000 5,403 9 10,000 5,002 10 10,000 4,632 11 100,000 42,888 npv 109,989Related Questions
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