Question

# You have an investment from which you can receive your return in one of the following...

You have an investment from which you can receive your return in one of the following ways: Option A: An annuity with payments of \$100,000 each for the next ten years, with the first payment commencing today. Option B: A lump-sum one-time payment of \$1,005,757 after five years. The interest rate is 6%, compounded annually. Which option has the greater present value?

• Option B.

• Both options have the same present value.

• Option A.

We need to find the present value of both the options.

Option A: Present Value of Annuity using financial calculator

We take the present value of 9 future cash annuities and add 1 annuity received today to find the present value

PV 0f 9 annuities

PMT = 100000

FV = 0

I/Y = 6

N = 9

Compute PV we get, 680,169.23

Hence PV of option A = 680169.23+100000 = 780,169.23

Option B :

FV = 1,005,757

I/Y = 6

N = 5

PMT = 0

Compute PV we get 751,560

Option A has greater present value

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