Question

(i) You are given the following options: Alternative 1: Receive 10 years from now a single...

(i) You are given the following options:

Alternative 1: Receive 10 years from now a single payment of 75,000.

Alternative 2: Receive 10,000 each year for 5 years, the first payment now.

Alternative 3: Receive 25,000 now and the same amount 5 years from now.

Suppose the interest rate is 5% per annum. Which option is the best?

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Answer #1

In order to find out which option is the best, we calculate the present value of benefit from each alternative option available. This leads us to the answer that alternative 1 is the best option. The calculation along with detailed explanation is as follows:

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