Question

You have the option of receiving a revenue stream of $400,000 per year for 8 years or to
receive a single payment of $2,474,400 today. Which option should you choose? Bank
interest rates are 6.00% per year, compounded annually.

Answer 1

=> Answer:- we should choose single payment of $2474400

Explanation::-

here we find the present value of revenue to compare both options.

PW = P * [ 1- (1/(1+r)^n / r) ]

= $400000 [ 1- (1/1.06^8)/ 0.06]

= $400000 [ 6.20979381]

= $2483917

so present value of second option is $2483917

=> so here we have two options:-

option 1 :- $2474400 today by single payment

option 2 :- $2483917 present value if get next 8 years

=> by comparison of both options we should get approximately equal amount so we should choose option one and get amount now instead of waiting more 8 years.