Question

James has received a college scholarship and can choose whether to receive it as an immediate one-time payment of $5000 or as a series of four equal payments (at the end of each year), each totaling $1500. Assume that James has a discount rate of 5%. Only considering TVM principles, which option is most valuable to James?

Immediate payment of $5000.

Series of four payments of $1500 each.

Both scenarios are equal.

There is not enough information to determine the answer.

Answer 1

Information provided:

Annual payment= $1,500

Time= 4 years

Interest rate= 5%

The question is solved by computing the future value.

Enter the below in a financial calculator to compute the future value:

PMT= 1,500

N= 4

I/Y= 5

Press the CPT key and FV to compute the future value.

The value obtained is 6,465.19.

Thus, the value in 4 years is $6,465.19.

Therefore, the second option of a series 4 equal payments is more valuable to James.

In case of any query, kindly comment on the solution.