Question

A morning radio show offered the following four prizes as alternative prizes for one of its competitions. Assuming an 11% discount rate, which is the most valuable prize? (Show working to justify your answer.)

(a)  $8,000 every year for 4 years, with the first amount paid at year 5.

(b) $5,500 every year for 4 years, with the first amount paid today?

(c)  $1,800 every year, forever, with the first amount paid after 1 year.

(d) $1,000 now, $9,000 in 3 years, and $20,000 in 8 years.

(e)  State the most valuable prize. (Give a reason for your choice.)

Answer 1

For calculating the most valuabvle prize, we have tp calculate the present values of each prize.

PV = Cash Flow / (1 + Discount Rate )^ Year

In the excel file, all the PV values of each prize has been calculated and we can see that the PV of Prize B is the highest.

Hence, Prize B is most valuable.

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