Question

You inherit $527,000. You can receive the $527,000 in one lump sum payment today or, alternatively, receive two amounts: $327,000 in 7 months and $220,000 in 21 months from today. If you can earn 5.5% per annum compounding monthly on your monies, what is the value of the option to receive two payments

Answer #1

**Answer: $518,371**

To consider the Present value of option we have to find Present value for both cash inflow.

PV = FV / (1+r)n

Where FV = Future value, R = rate of Interest, n = number of periods.

Here We have interest compounding on a monthly basis. So,
monthly interest rate = 5.5/12 = **0.4583333%**

PV of $327,000 receivable after 7 months from today.

= 327000/ (1+0.004583)7

**= $316,698**

PV of $327,000 receivable after 7 months from today.

= 220000/ (1+0.004583)21

**= $201,673**

**So, the total value of the alternative option
is**

**$316,698 + $201,673 = $518,371**

You inherit $545,000. You can receive the $545,000 in one lump
sum payment today or, alternatively, receive two amounts: $345,000
in 10 months and $220,000 in 21 months from today. If you can earn
11.6% per annum compounding monthly on your monies, what is the
value of the option to receive two payments (in present day
value)?

You inherit $418,000. You can receive the $418,000 in one lump
sum payment today or, alternatively, receive two amounts: $218,000
in 8 months and $220,000 in 21 months from today. If you can earn
7.6% per annum compounding monthly on your monies, what is the
value of the option to receive two payments (in present-day value)?
(to nearest whole dollar,; don’t use $ sign or commas)

You inherit $402,000. You can receive the $402,000 in one lump
sum payment today or, alternatively, receive two amounts: $202,000
in 8 months and $220,000 in 21 months from today. If you can earn
13.1% per annum compounding monthly on your monies, what is the
value of the option to receive two payments (in present day
value)?
(to nearest whole dollar,; don’t use $ sign or commas)

Suppose you will receive $17,000 in 7 months and another $11,000
in 21 months. If the discount rate is 7% per annum (compounding
monthly) for the first 10 months, and 14% per annum (compounding
monthly) for the next 11 months, what single amount received today
would be equal to the two proposed payments? (answer to the nearest
whole dollar; don’t include the $ sign or commas)

A. A contract features a lump-sum future flow of $46,000 three
years from today. If you can now purchase that flow for $42,201.84,
then what annual implied return would you earn on this
contract?
B. An annuity contract will make 8 annual payments and the first
payment occurs exactly a year from today. If the annuity has a 9.2%
rate and a current PV or price of $308.98, then what must be the
size of its annual payments?
C. An...

Suppose you will receive $19,000 in 7 months and another $13,000
in 22 months. If the discount rate is 5% per annum (compounding
monthly) for the first 10 months, and 10% per annum (compounding
monthly) for the next 12 months, what single amount received today
would be equal to the two proposed payments? (answer to the nearest
whole dollar; don’t include the $ sign or commas)

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.

Ben Cunnington is planning for his retirement and has $50,000 to
invest as a lump sum into a retirement investment plan. Ben plans
to work for another 35 years before retiring at the age of 65 and,
as well as the $50,000 lump sum, he plans to deposit $1,500 into a
capital secured share index fund each month of his remaining
working life. He estimates that his retirement account will
generate an annual return of 7%. Ben plans to retire...

Suppose you win the lottery, and the jackpot is $50,000,000!
You may either choose the annual payment option or the lump sum
cash option. If you choose the annual payment option, then you will
receive 20 equal payments of $2,750,000 – one payment TODAY and one
payment at the end of each of the next 19 years. If you choose the
lump sum option, then you will receive $39,194,650.87 today.
Suppose you can invest the proceeds at 3.25%.
Which option...

T/F: Since some retirees might prefer to receive a one-time
(lump-sum) payment from SS, rather than the current system’s annual
stream of payments for as long as the retirees live, a Pareto
improvement would result if retirees were allowed to choose between
those two options.

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