Question

Your grandfather would like to share some of his fortune with you.

He offers to give you money under one of the following scenarios​ (you get to​ choose):

1.	$7,250 a year at the end of each of the next eight years
2.	$49,950 ​(lump sum) now
3.	$98,650 ​(lump sum) eight years from now

Calculate the present value of each scenario using

an 8​% interest rate. Which scenario yields the highest present​ value? Would your preference change if you used a 10​% interest​ rate?

Answer 1

When Interest rate is 8%		PV
Option 1:
$7,250*PVAF(8%,8 years)
$7,250*5.74664		$41,663
Option 2		$49,950
Option 3:
$98,650*PVIF(8%,8 years)
$98,650*0.54027		$53,298
As PV of Option 3 is highest hence the same should be selected
When Interest rate is 10%		PV
Option 1:
$7,250*PVAF(8%,8 years)
$7,250*5.33493		$38,678
Option 2		$49,950
Option 3:
$98,650*PVIF(8%,8 years)
$98,650*0.46651		$46,021
As PV of Option 2 is highest hence the same should be selected