Question

2. You have a choice of $1 million in 50 years or $1,600 today. If your interest rate is 14%, which would you choose? (show your work to receive credit).

3. You are looking at 2 investments. One will pay you $550 a year for the next 15 years. The other one will pay you $24,000 in 20 years. If your rate of return is 9%, which is the best investment for you? (show your work to receive credit).

Answer 1

2.Present value of $1 million=1,000,000*Present value of discounting factor(rate%,time period)

=1,000,000/1.14^50

=1,000,000*0.0014280961

=$1428.1(Approx)

Hence $1600 today is better having higher present value

3.Option a:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=550[1-(1.09)^-15]/0.09

=550*8.06068843

=$4433.38(Approx)

Option b:

Present value=24000*Present value of discounting factor(rate%,time period)

=24000/1.09^20

=24000*0.17843089

=$4282.34(Approx)

Hence $550 a year for the next 15 years is better having higher present value.