Riverbed Inc. has $702,260 to invest. The company is trying to
decide between two alternative uses of the funds. One alternative
provides $93,186 at the end of each year for 12 years, and the
other is to receive a single lump-sum payment of $2,203,990 at the
end of the 12 years. Which alternative should Riverbed select?
Assume the interest rate is constant over the entire
investment.
| Alternative OneAlternative Two |
| Let Assume Interest Rate = 6% | |
| Computation of P V of Alternative -1:- Annual Amount for 12 Year | |
| Annual Amount | $93,186.00 |
| CummPVAF @ 6% for 1-12 year | $8.38 |
| Present value (93186X 8.38384) | $781,256.51 |
| Computation of P V of Alternative -2:- Single Lump sum Payment | |
| Single Payment | $2,203,990.00 |
| PViF @ 6% at end of 12 year r | 0.49697 |
| Present value (2203990*0.49697) | $1,095,316.91 |
Aletrnative -2 is better
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