Question

Sylvia DeLoach has the following choices:

• To receive $40,000 at the end of 9 years,
• or $72,000 at the end of 18 years.
• or to receive $18,000 today,

Assuming that her required rate of return is 11%, which offer should she accept? Why?

Answer 1

Answer : Determination of as to which she should choose :

To determine , we need to calculate Present Value under each of the alternatives :

Present Value To receive $40,000 at the end of 9 years

Present Value = Future Value / (1 + rate)^number of years

= 40000 / (1 + 0.11)^9

= 40000 / 2.558036924

= 15636.99

Present Value To receive $72,000 at the end of 18 years

Present Value = Future Value / (1 + rate)^number of years

= 72000 / (1 + 0.11)^18

= 72000 / 6.54355

= 11003.20

Receive Today i.e 18000

Therefore it is better to receive $18000 today as it has the highest Present Value .