Answer:
Results are below.
Step-by-step explanation:
Giving the following information:
She can either take it in five installments of $60,000 annually, starting from now; or she can take a lump-sum of $255,000 now.
<u>First, we determine the value of the 5 installments using a 5% annual compounded rate.</u>
We calculate the future value, and then the present value:
FV= {A*[(1+i)^n-1]}/i
A= annual payments
FV= {60,000*[(1.05^5) - 1]} / 0.05
FV= $331.537.88
PV= FV/(1+i)^n
PV= $259,768.60
At an annual rate of 5% compounded annually, she should choose the five installments instead of the $255,000.
<u>Now, if the annual rate is 6% continuously compounded.</u>
<u>First, we need to calculate the effective interest rate:</u>
r= e^i - 1
r= effective inerest rate
r= e^0.06 - 1
r= 0.0618
FV= {60,000*[(1.0618^5) - 1]} / 0.0618
FV= 339,443.23
PV= 339,443.23/1.0618^5
PV= $251,509.01
At an annual rate of 6% compounded continuously, she should choose the $255,000.
