Question

      Would you rather receive: $15,000 in three years, $1,000 per year for 20 years or $2000 per year for 15 years if the discount rate is 20%?

why

Answer 1

a.Present value=$15000*Present value of discounting factor(rate%,time period)

=15000/1.2^3

=15000*0.578703703

=$8680.56(Approx).

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

=1000[1-(1.2)^-20]/0.2

=1000*4.869579733

=$4869.58(Approx).

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

=2000[1-(1.2)^-15]/0.2

=2000*4.675472642

=$9350.95(Approx).

Hence $2000 per year for 15 years must be selected having highest present value.