Question

BUSI 320 Problem#3 (**Decision #1)**

Use what you have learned about the time value of money to analyze each of the following decisions:

**Decision #1: Which set of Cash Flows is
worth more now?**

Assume that your grandmother wants to give you generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive:

** Option A: Receive a one-time
gift of $10,000 today. **

**Option B: Receive a $1600 gift
each year for the next 10 years. The first $1600 would be received
1 year from today.**

**Option C: Receive a one-time
gift of $20,000 10 years from today.**

*Compute the Present Value of each of these options if you
expect the interest rate to be 3% annually for the
next 10 years. Which of these options does
financial theory suggest you should choose?*

** Option A would be
worth $__________ today.**

** Option B would be
worth $__________ today.**

** Option C would be
worth $__________ today.**

** Financial theory
supports choosing Option _______**

** **

*Compute the Present Value of each of these options if you
expect the interest rate to be 6% annually for the
next 10 years. Which of these options does
financial theory suggest you should choose?*

** Option A would be worth
$__________ today.**

** Option B would be worth $__________
today.**

** Option C would be worth $__________
today.**

** Financial theory supports
choosing Option _______**

*Compute the Present Value of each of these options if you
expect to be able to earn 10%
annually for the next 10 years.
Which of these options does financial theory suggest you should
choose?*

** Option A would be
worth $__________ today.**

** Option B would be
worth $__________ today.**

** Option C would be
worth $__________ today.**

** Financial theory
supports choosing Option _______**

Answer #1

Decison # 1

Option A; PV = $10,000

Option B; PV =

using above formula, PV = 1600 x (( 1 - 1/(1+.03)^10)) / (.03) = 13,648

Option C; PV = FV / (1+r)^n = 20000 / (1+0.03)^10 = 14,882

Hence select Option C

Decision # 2: with 6%,

Option A; PV = 10000

Option B; PV = 1600 x ((1-1/(1+0.06)^10) / (0.06) = 11776

Option C; PV = 20000 / (1+0.06)^10 = 11167

Hence, select option B

Decision # 3:

Option A; PV = 10000

Option B; PV = 1600 x (1-1/(1+.1)^10))/0.1 = 9831

Option C; PV = 20000 / (1+0.1)^10 = 7711

Hence, select option A

Decision #1: Which set of Cash Flows is worth more now?
Assume that your grandmother wants to give you generous gift.
She wants you to choose which one of the following sets of cash
flows you would like to receive:
Option A: Receive a one-time gift of $10,000 today.
Option B: Receive a $1600 gift each year for the next 10 years.
The first $1600 would be received 1 year from today.
Option C: Receive a one-time gift of $20,000...

Decision #1: Which set of Cash
Flows is worth more now?
Assume that your grandmother wants to give you generous
gift. She wants you to choose which one of the following
sets of cash flows you would like to receive:
Option A: Receive a one-time gift of $10,000
today.
Option B: Receive a
$1600 gift each year for the next 10 years. The first
$1600 would be
received 1 year from
today.
Option C: Receive a one-time gift of $20,000
10 years from today.
Compute the...

Decision #1: Which set of Cash Flows is
worth more now?
Assume that your grandmother wants to give you generous
gift. She wants you to choose which one of the following sets of
cash flows you would like to receive:
Option A: Receive a one-time gift of $10,000 today.
Option B: Receive a $1600 gift each year for the next 10
years. The first $1600 would be
received 1 year from today.
Option C: Receive a one-time...

Decision #1: Which set of Cash Flows is
worth more now?
Assume that your grandmother wants to give you generous
gift. She wants you to choose which one of the following sets of
cash flows you would like to receive:
Option A: Receive a one-time gift of $10,000 today.
Option B: Receive a $1600 gift
each year for the next 10 years. The first $1600 would
be
received 1 year from today.
Option C: Receive a one-time...

Assume that your grandmother wants to give you generous
gift. She wants you to choose which one of the following
sets of cash flows you would like to receive:
Option A: Receive a one-time gift of $10,000
today.
Option B: Receive a
$1600 gift each year for the next 10 years. The first
$1600 would be
received 1 year from
today.
Option C: Receive a one-time gift of $20,000
10 years from today.
Compute the Present Value of each of these options
if you expect...

Decision #1: Which set of Cash
Flows is worth more now?
Assume that your grandmother wants to give you generous
gift. She wants you to choose which one of the following
sets of cash flows you would like to receive:
Option A: Receive a one-time gift of $ 10,000
today.
Option B: Receive a $1400 gift each year for
the next 10 years. The first $1400 would be
received 1 year from
today.
Option C: Receive a one-time gift of $17,000
10 years from today.
Compute...

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.

Problem 2 Comparing Options Using Present Value Concepts
After hearing a knock at your front door, you are surprised to
see the Prize Patrol from a large, well-known magazine subscription
company. It has arrived with the good news that you are the big
winner, having won $12.5 million.
You discover that you have three options:
(1) you can receive $1.25 million per year for the next 10
years,
(2) you can have $10 million today, or
(3) you can have...

Present Value Computations
Assuming that money is worth 10%, compute the present value
of:
1. $6,000 received 15 years from today.
$Answer
2. The right to inherit $2,000,000 14 years from now.
$Answer
3. The right to receive $2,000 at the end of each of the next
six years.
$Answer
4. The obligation to pay $1,000 at the end of each of the next
10 years.
$Answer
5. The right to receive $10,000 at the end of the 7th, 8th,...

Assuming money is worth 8% compute the present value of the
following - be sure to include how you arrived at your
answer
$7,000 received 15 years from today
The right to receive $1,000 at the end of each of the next
six years
The obligation to pay $3,000 at the end of each of the next
10 years

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