Question

Suppose that in their divorce settlement, husband offers wife Rs.10 lakhs spread evenly over 10 years, but she instead demands Rs. 5 lakhs now. If the appropriate discount rate is 8 percent, which alternative is better for husband and which for wife?

Select one:

a. 10 lakhs over 10 years is better for husband

b. 10 lakhs over 10 years is better for wife

c. 5 lakhs now is better for husband and wife both

d. 5 lakhs now is better for wife

Answer 1

10 lakhs spread over 10 years evenly means each year 1 lakhs.

So, we need to calculate present value of that 10 lakhs.

Present value of 1 year amount=1,00,000/1.08=92,592.6

Sum of all 10 year present value=92,592.6({1/1.08}^10-1)/({1/1.08}-1)

92592.6*(0.46-1)/(-0.074)=92,592.6*0.54/0.074=675,675.729

So present value of 10 lakhs over 10 year evenly ,is 675,675.729

And the next alternative present value is 500,000.

So as husband is paying divorce settlement,so lower amount will be better for him .so 5 lakhs now is better for husband.

Wife is getting the settlement,so she wants the maximum amount possible.so 10 lakhs over 10 years is better for wife.