Question

You will receive the following cash payments as a retirement settlement: Year 0 1 2 3 4 Amount $10,000 $20,000 $50,000 $50,000 $75,000 In place of the above you are offered a check today for $182,000. Assuming an interest rate of 4%, which would you choose? If an interest rate of 5% was used would this change your selection? Explain.

You are offered a choice as follows: $10,000 per year for 10 years or an amount today of $69,000. Assuming an interest rate of 7%, which should you choose?

You purchased an autographed basketball signed by Larry Bird for $1,000. The ball increased in value by 10% per year for 10 years. The next 15 years it increased at a rate of 15%. What is that ball now worth?

Answer 1

Ans 1:

Offer 1

	Year	0	1	2	3	4	Total
a	Cash inflow	10000	20000	50000	50000	75000
b	PV Factor @ 4%	1	0.9615	0.9246	0.889	0.8548
c	PV Factor @ 5%	1	0.9524	0.907	0.8638	0.8227
(a*b)	PV @ 4%	10000	19230	46230	44450	64110	184020
(a*c)	PV @ 5%	10000	19048	45350	43190	61702.5	179290.5

If interest rate is 4% then $ 182000 today should be accepted because present value of offer 1 are more i.e 184020.

If interest rate is 5% then $ 182000 today should be accepted because the present value of offer 1 is less i.e 179290.50

Ans 2 :

Offer 1- $10000 per year for 10 years

Present value of the offer = $10000 X PVAF(7%,10)

=$10000 X 7.02358

=$ 70235.80

Offer 2 - $ 69000 Today

Present value of the offer = 69000

Offer 1 should be accepted as it has a hgher PV.

Ans 3 :

Worth of the ball today = $ 1000 X PVAF(10%,10) X PVAF(15%,15)

= $1000 X 6.1444 x 5.8474

= $35928.76